This morning’s advance estimate of 4Q GDP was a disappointment relative to the pre-report consensus. The Commerce Department reported that 4Q GDP rose only 2.8% (annual rate) following 1.8% in the 3Q. The pre-report consensus was 3.2%.
The Bureau of Economic Analysis noted that the improvement in the 4Q reflected increases in private investment in inventory, consumer spending and residential and non-residential investment. Negative contributions included a slowdown in federal, state and local spending by governments.
The price index for domestic purchases paid by US residents (formerly the GDP Price Deflator) increased 0.8% in the 4Q, down from 2.0% in the 3Q. Real disposable personal income increased 0.8% in the 4Q following a decrease of 1.9% in the 3Q.
While today’s GDP report was a disappointment, it did show that the economy grew at the fastest pace since the 2Q of 2010. Despite that, stocks opened lower on the day.
Following the GDP report, the University of Michigan Consumer Sentiment Index for January came in slightly better than expected at 75.0, up from 74.0 in the previous report. Overall, consumer confidence has enjoyed a nice bounce in the last few months.
While the 4Q GDP report was somewhat disappointing, it does reduce the odds that the US economy will fall back into recession, barring some significant negative surprise. Speaking of potential surprises, we should keep an eye on Portugal which is having big problems peddling its debt. I’ll have more to say about that in an upcoming E-Letter.
Fed Lowers Outlook For Growth
The Fed Open Market Committee (FOMC) concluded its January policy meeting on Wednesday and in its press release indicated that the Fed Funds rate would be maintained at 0% to .25% until late 2014. Previously, the Fed had stated it would hold the rate at that level only until mid-2013.
Fed Chairman Bernanke stated in his press conference that the FOMC members had revised their economic forecasts downward since the last meeting and indicated this was the reason to keep the Fed Funds rate near zero until late 2014. This was a bit of a surprise.
For the first time, the Fed released its heretofore private economic assumptions. Here are the new forecasts, along with their November 2011 forecasts for comparison:
Even though the economy rebounded somewhat in the 4Q, the members of the FOMC (on balance) elected to lower their growth forecasts for 2012 and 2013. For all of 2012, the Fed expects GDP to grow at an annual rate of only 2.2% to 2.7%. In my E-Letter on Tuesday, I wrote at some length about why GDP growth in the first half of 2012 is not likely to equal that in the 4Q of 2011. This same line of reasoning may explain why the Fed lowered its growth target.
As for the unemployment rate, the Fed doesn’t see it dropping below 8% until sometime in 2013 at the earliest. Keep in mind that the unemployment rate does not count those who have stopped looking for work. However, the positive economic news from the 4Q could make people not looking for work decide to start looking again. If enough people start looking, it could actually make the unemployment rate go UP.
As for inflation, the Fed’s projections did not change materially. They believe that the Personal Consumption Expenditures (PCE) inflation rate – the Fed’s version of the CPI – will remain at or below 2% for all three years. This could be a real stretch because the Consumer Price Index averaged 3.0% for all of 2011. The CPI has been trending lower since September, but it remains to be seen if it will fall to 2.0% or below for all of this year.
The Fed’s pledge to keep short-term rates near zero for another three years is a testament to how worried they are about another financial crisis. It also has bearish implications for the US dollar, not to mention the stress it puts on folks living on fixed incomes. Here’s an interesting perspective on the Fed’s promise to keep rates near zero until 2014:
http://www.realclearmarkets.com/articles/2012/01/25/feds_pledge_cracks_dollars_foundation_99486.html
Obama’s State of the Union Speech
For a president whose job approval rating remains quite low, you’ve got to hand it to him – he’s sticking to his guns. To the surprise of no one, he will campaign against what he will call the “do-nothing Congress,” Republicans and the 1%. I would love to critique his speech but I will leave that to a couple of others in the links below. All I will say is, Obama reportedly used the word “I” 49 times in his SOTU speech. It’s all about him!
Obama’s Empty Words
http://www.realclearpolitics.com/articles/2012/01/26/after_obamas_empty_words_daniels_said_it_all__112924.html
Obama: The State of His Policies
http://online.wsj.com/article/SB10001424052970203718504577181073385102022.html?mod=djemEditorialPage_h
Have a great weekend everyone!
