Friday, January 29, 2010

Behind the eye-popping GDP number 

I read the report and I think it's a half-full-half-empty story you can tell.

Half-full: the 5.7% headline number is supported by positive data on investment, including a 13.3% increase in equipment and software. Real disposable personal income rose 2.1% in the quarter. Personal outlays were up 4%. This would indicate some expansion of consumer spending. A sharp rise in inventories -- more than half the gain in GDP comes from there -- indicates businesses are more confident of future sales.

Half-empty: Reflecting that huge expected increase in GDP is an upsurge in business inventories. Real final sales were up 2.2% versus 1.5% in the third quarter. While better, it hasn't reached a level that gets you to a sustained decline in unemployment yet (I'd think that would happen with a final sales number in the 2.75-3% area.) The savings rate rose to 4.6% from 4.5%, so consumption growth was down to 2% from 2.8% in the third quarter. And durable goods consumption actually fell in Q4, perhaps reflecting the end of Cash for Clunkers. Personal income less transfers (my doppelganger for calling the recessions end is just back to Q2 levels, as government transfer payments added an extra $25 billion to pocketbooks.

After running out to a 100 point gain on the morning news, the Dow has slid back a good bit since mid-morning. I caution people not to read something into every turn, but I think the market is looking at these data as confirming their expectations, not changing them too much in one way or the other. I thought there was more danger from a negative surprise than happiness from a positive one, and while this number is the high end of expectations the mixture of good and bad news in these data will end up causing the largest increase in GDP in years to cause most to yawn. And that's pretty odd when you think about it.

Jim Hamilton concurs, but uses pretty graphs.