Q4/07 GDP +0.6%; Better Than It Looks

Q4/07 GDP +0.6%; Better Than It Looks

January 31, 2008 0 Comments

(January 31, 2007) – Yesterday morning, the Commerce Department reported a substantial drop in GDP growth during the fourth quarter of 2007 to 0.6% from Q3’s 4.9%; this was lower than the 1.1% growth expected by economists and the weakest growth since 2002. Contributing to Q4’s slowed growth, consumer spending slowed slightly in Q4 adding only 1.37% to growth compared with 2.01% in Q3, while investments in houses dropped at their fastest rate in 26 years, subtracting 1.18% from GDP growth; exports grew at a slower pace, contributing only 0.46% to GDP growth compared to 2.1% in Q3. In addition, inventory investment reduced real GDP growth by 1.25 percentage points after having added 0.89% in Q3, led largely by downturns in motor vehicle inventories. You can find the full advance GDP Report here at the BEA’s website.

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In addition to the Q4 data, the Commerce Department measured GDP growth for all of 2007 at 2.2%, down from 2.9% in 2006 and the slowest annual growth since 2006.

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Strange as it seems, this report implies stronger growth in coming quarters. The $23.9 billion reduction in inventories during the quarter reduced growth by 1.18 percentage points – translated into English, this means that people bought $23.9 billion more in goods and services than companies produced. Equivalently, final sales of domestic product increased by $54.9 billion, more than double the quarter’s $18.5 billion increase in GDP. This can’t go on for long; inventories are already quite low. Eventually firms must increase output to meet demand. When that happens, GDP growth will rise.

How much? Considering that without the decline in inventories the Q4 number would have been 1.85%, this would not be a bad estimate for Q1/08. If companies actually add to inventories, or if housing investment improves somewhat, the number could be higher, somewhere in the 2-3 percent range.

If that’s the case, then not only will the U.S. economy avoid the two negative-growth quarters required for a recession, we won’t have any negative-growth quarters.

What do you think that information will do to the stock market?

JR

John Rutledge

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