1/27/2012
By David Urani, Research Analyst

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Q4 GDP is in the books and overall you'd have to say it was not quite up to snuff. The headline increase of 2.8% fell short of the 3.1% consensus, and while that is a little bit soft, on another day it may not do much to dent the market. The devil is in the details, where a few different metrics suggest that the soft headline number was not even as strong as it appears.

But we'll start off with the one nugget of decent news, which is that personal consumption, the engine of the economy, increased by 2.0% for the quarter. That was up from 1.7% in the previous quarter, and it contributed 1.45% of the 2.8% headline GDP increase. Not a blowout but at least steady improvement.

Now let's talk about where the result goes awry. I think the most alarming item, and what may have sparked most of the market pullback, was the build in inventories. Increases in inventories contributed a hefty 1.9% of the 2.8% headline GDP figure. That indicates that most of the increase in GDP in the fourth quarter was restocking rather than end demand. "Final Sales," (which essentially takes the headline number and removes the inventory build) an indicator of end demand, were up 0.8%. That was a notable drop-off from 3.2% in the third quarter and 1.6% in the second quarter. Another side effect of a big build in inventory could be the onset of discount sales in 1Q.

One last issue was the price index which is used to adjust the numbers for inflation. The report has the price index rising by a surprisingly low 0.8% whereas it was widely expected to be similar to the previous quarter's 2.0% reading. The drawback to that, for some investors, is that the nominal unadjusted figure of the GDP dollar value will have been lower than many were imagining it to be.

David Urani
Wall Street Strategies