The economy sprung into action last quarter, growing at a whopping annualised 5.7 per cent, its fastest pace in six years. Analysts surveyed by Bloomberg were only expecting a 4.5 per cent increase. Investors initially cheered, with the S&P 500 rising 1.1 per cent in its first hour of trade.
Could anyone possibly see a downside?
Of course. Bears will be bears.
“The 5.7 per cent annualised jump in fourth quarter GDP, up from 2.2% in the third, will undoubtedly convince a lot of people that the economic recovery is now in full swing and will go from strength to strength this year,” wrote Paul Ashton of Capital Economics. “Unfortunately, that isn’t the case.”
Indeed.
A full 3.4 percentage points of the growth was due to a slowdown in inventories being run down. Aside from not being the strongest measure of sustainable growth, it’s one that’s subject to radical revisions.
Remember the fourth quarter of 2008, when estimates initially showed inventories boosted GDP by 1.3 percentage points, only to later find they subtracted 0.1 percentage points?
And consumer spending actually slowed from 2.8 per cent in the third quarter to 2.0 per cent in the fourth. That, at least, might not be as bad as it seems, the cash for clunkers programme had provided a major in the earlier quarter, and 2 per cent still shows strong growth. But then, the weather might have been part of what loosened consumers wallets this quarter – spending on housing and utilities increased GDP by 0.44 percentage points.
And what do the numbers mean for the labour market?
“With final demand growth remaining weak, there is little prospect for a turnaround of employment in the near future,” said Dean Baker, co-director of the Center for Economic and Policy Research.
So there’s that. And it may have been enough even to convince the markets, which weren’t happy by the end of the day, with the S&P closing down almost 1 per cent.
