January 27, 2006
NOW WHAT? WAIT FOR A REVISION, OF COURSE
No matter how you spin it, a drop to 1% from 4% is something more than trivial.
The big question now is whether the advance estimate of 1.1% growth for the economy in the fourth quarter portends a recession or merely a slowdown in 2006. Some pundits continue to think that neither is coming. Then again, weren't we warned recently of darker days ahead via the inverted yield curves?
In any case, there are the numbers to digest; taken at face value, they paint a troubling profile. GDP rose at the slowest pace in three years in the last three months of 2005, the Bureau of Economic Analysis reports. Digging deeper, the stats only get worse, starting with the massive 17.5% fall in durable goods purchases in the fourth quarter--the biggest decline in 18 years. And while consumer purchases kept rising during October through December, they did so at a slim 1.1% pace, or the slowest rate of ascent since the last recession in the second quarter of 2001.
To say that economists were surprised by the GDP report is something of an understatement. The consensus forecast called for a 2.8% rise. The fact that the actual number came in at only 1.1% tells of the vast disconnect between expectations and reality.
The question is whether the advance GDP report constitutes reality, a line of inquiry that's found much attention today in the wake of the economic news. Knowing full well that each and every GDP report is revised, some are holding out the hope that today's 1.1% fourth-quarter rise will evolve into something more encouraging when the government dispenses the so-called preliminary report and then the final one.
Indeed, some dismal scientists are scratching their heads. "It's hard to recall a more puzzling 'advance' estimate of real GDP," writes David Resler, chief economist at Nomura Securities in New York, in a letter to clients after the report's release. "While it is not unusual for forecasters to miscalculate the high frequency (monthly) indicators, it is rare indeed for EVERYONE to be so far off a quarterly GDP number because nearly 2/3 of the inputs to the advance estimate are already 'known.' It's hard to escape the inference that "everything we knew (or thought we knew) is wrong."
Yet all's not lost, Resler continues. Separately reported numbers for consumer purchases suggest that consumer spending is stronger than the GDP lets on. "Previously reported monthly numbers showed that real consumer spending in November was just 0.1% above its third quarter average," he writes, adding…
Even allowing for the December surge in vehicle sales and the likely increase in spending for home-heating, the December retail sales report seemed to make it quite unlikely that consumer spending growth could grow enough in December to generate even 0.5% quarterly growth much less the 1.1% gain reported by the BEA. The BEA won't make the monthly details known until Monday, but its quarterly estimates imply that, without revisions to the two previous months, real consumer spending jumped by 1.2% in December. That would put consumer spending on a very strong first quarter trajectory of 4.3% growth BEFORE Q1 even starts.
Ian Shepherdson, chief U.S. economist for High Frequency Economics, cuts to the chase, stating, "We expect big upward revisions [in the fourth-quarter GDP report," he tells MarketWatch.com.
Ken Mayland, president of ClearView Economics, virtually dismisses the fourth-quarter slowdown,
noting in a Bloomberg News article today: "I fully expect the economy to bounce back strongly in the first quarter.''
Mark Zandi, chief economist at Moody's Economy.com today says flat out: "I'm not at all worried about the health of the economy," according to AP via ABC News. He predicts the economy will return to form in this year's first quarter by expanding at a robust 4% annualized pace.
Hope, in sum, continues to spring eternal, warning signs or not.
Posted by jp at January 27, 2006 12:08 PM
You didn't mention the surprisingly strong housing number that was also announced today...
Posted by: thc at January 27, 2006 10:04 PM
The responses to the GDP numbers remind me that when human beings are confronted with facts that contradict their beliefs, their first reaction is to reject the new fact and to look for evidence that supports their belief. It may well be that the GDP numbers will be revised upwards, and I wouldn't take drastic action at this time, but I would don my parachute and position myself close to the exit.
Posted by: M Pokrant at January 27, 2006 5:25 PM