The U.S. economy grew at its fastest pace in 1-1/2 years in the fourth quarter, but a strong rebuilding of stocks by businesses and weak spending on capital goods hinted at slower growth in early 2012.
CARY LEAHEY, ECONOMIST, DECISION ECONOMICS, NEW YORK:
There's something for everyone in this report. If you're bearish, this GDP report supports your view and if you're positive on the economic outlook, you can find support for that in this report as well.
The aggregate number was not bad, but it was dominated by a boost in inventories so that underlying final demand - what you and I buy - was only up about 1 percent.
The naysayers on the economy will say consumer spending was okay at 2 percent, but the slowdown in investment spending means the first quarter number will be significantly weaker.
If you remain optimistic, you can point to an improvement in the labor market and improved consumer attitudes. The improvement in employment and consumer attitudes should support better spending and better spending should support more hiring. That would lift final demand in first half of the year.
I think GDP will grow 2 percent this year, but the first quarter will probably be weaker. The slowdown in underlying demand is not a consumer story. Consumer spending has been okay. It's the investment story. After booming for almost a year, it flatlined in the fourth quarter. That could be related to the expiration of certain tax incentives for business investment, but we don't know for sure.
GUS FAUCHER, SENIOR MACROECONOMIST, PNC FINANCIAL SERVICES, PITTSBURGH
This is in line with expectations. The details of the report are fine. Business spending continues to drive growth. It's disappointing in the sense that there is still a lot of slack in the economy.
There was a small drag from net imports and there was a big drag in government. Government will remain a significant drag on growth this year; we are talking about a half a percentage point here. We could also see a further downward revision in trade due to Europe.
Inflation remains contained. Deflation is more of a concern at this point, although I don't see it happening. This validates the Fed's approach taken on Wednesday that it's (inflation) below where it would like to see it.
DAVID WATT, SENIOR CURRENCY STRATEGIST, RBC CAPITAL, TORONTO
It's not that encouraging, but again, it's not going to affect the Fed. They're downplaying the recent economic numbers anyway. This seems consistent with the Fed's view that the U.S. economy is going to need all the help it can get to hit escape velocity in the next couple years.
TOM PORCELLI, CHIEF U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK
The inventory swing over the last couple of quarters has really wreaked havoc on the headline, so we're encouraging people to dig down below the headline.
But personal consumption is not gaining momentum and the methods the consumer has used to keep the momentum going over the last few quarters is -- we hope -- expected to fade. Because it has mainly been savings and credit usage, and when you're going through a deleveraging process that is not a good thing to see.
MIKE SHEA, A MANAGING PARTNER AND TRADER AT DIRECT ACCESS PARTNERS LLC IN NEW YORK
All things considered, even though the median forecast was 3 percent, this is close enough that anyone who is disappointed isn't paying attention. This is a satisfactory number, not a strong number. I don't think this is a significant enough number on either end of the spectrum to driving trading today, with earnings coming out, but it will be a component. That's the mark of a more normal market.
DAVID SONG, CURRENCY ANALYST, DAILYFX, NEW YORK
It seems a little bit weaker than expected especially with the personal consumption reading. Right now, it seems (there is) stickiness in the rate of inflation, or core PCE which is watched by the Fed, so overall growth is not as strong as expected but inflation is not as soft as the Fed has put it. We're seeing a bit of U.S. dollar support on dampening risk taking behavior.
DAVID SLOAN, ECONOMIST, IFR ECONOMICS, A UNIT OF THOMSON REUTERS
The breakdown showed most of the growth coming from inventories, which reduces the need for further inventory gains in Q1. Final sales (GDP less inventories) increased by only 0.8%, well below a 2.5% consensus and suggesting underlying demand may be weaker than previously thought. The main downside surprises in the final sales breakdown were services consumption and defense spending. A 0.4% deflator was well below expectations, hit by weaker export prices. PCE price data, 0.9% overall and 1.1% ex food and energy showed a notable slowing, but was not quite as soft as expected. Still, the breakdown of this report, which may cause Q1 GDP forecasts to be trimmed, gives more ammunition to the Fed doves than the hawks.
The breakdown of the GDP report shows few signs of strength outside inventories, durables consumption and housing. Inventories added 1.94% to Q4 GDP, more than reversing a steep negative of 1.35% in Q3.
(Americas Economics and Markets Desk)