INDICATOR: Fourth Quarter GDP and Weekly Jobless Claims
KEY DATA: GDP: +3.2%; Consumption: +3.3%; Federal Government: -12.6%/Jobless Claims: 348,000 (up 19,000)
IN A NUTSHELL: "The economy did pretty well at the end of last year despite the valiant attempts by some in Washington to kill off growth."
WHAT IT MEANS: Neither snow nor cold nor knuckleheads in Washington could stay the economy from its course (my apologies to the Postal Service) and growth was pretty solid during the last three months of the year. The key to the increase was solid spending on the part of consumers. Households bought all sorts of things as demand was not concentrated in vehicles. Non-durables and services were up solidly as well. Despite some bad weather, the rise in services spending was not mostly due to heating needs. People traveled and ate out, a sign of growing confidence. In addition, U.S. firms hit the foreign markets hard and exports soared, even as imports were largely flat. That led to the trade deficit narrowing and adding 1.33 percentage points to growth. That is impressive. What was also impressive was another rise in inventories, though that holds out some real warnings about first quarter growth. After a huge restocking in the summer, it was assumed that firms would cut back on the goods in the warehouses. But that didn’t happen and I suspect there will be a major reduction in inventories this quarter that would slow growth sharply. What was not impressive was the slump in government spending due to the shut down. It took about one full percentage point out of growth. Without the shut down, the economy could have grown by 4% for the second consecutive quarter. Thankfully, the private sector managed to overcome the muddled thinking in Congress, though business investment was disappointing.
Jobless claims jumped last week but we shouldn’t read too much into that. The cold weather is wreaking havoc on the economy and it is impossible to know how much of the rise was due to the bad conditions. Indeed it may take weeks before we have a good reading on the labor market since this weather just keeps hanging on.
MARKETS AND FED POLICY IMPLICATIONS: This was a generally good report but it does raise some issues about first quarter growth. The inventories that were built up during the second half of the year look to be way out of line with sales and that means an adjustment is coming. Also, it is not likely that the sharp narrowing in the trade deficit will be sustained. On the other hand, Congress discovered some religion and government spending should add to growth. As for the weather, I wish I could stop talking about it but it matters. Both residential and business structure spending fell and it is unclear if that was due to weather or weakness in those sectors. The cold and snow undoubtedly slowed activity in January but who knows what will be the situation in February and March (please let the warmth come back soon!). This means that getting a good picture of the economy could take several more months, which is not a timeframe that traders consider reasonable. The Fed, though, will take things as they come and likely keep tapering and this report only helps fortify their position.