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January 27, 2006
Disappointing GDP
Reuters has the headline of the day: Forecasters way off on growth estimates.
The Wall Street Journal has some responses from economists, including Angry Bear's Kash Mansouri
The only thing that kept GDP growth positive at all was a massive build-up in inventories -- the largest increase in inventories since early 2002. Apparently businesses were caught off guard by the slowdown in demand, and have not yet slowed their production accordingly. Presumably, they will. All in all, this is an extremely worrying report. I've been bearish about economic growth in 2006 for a little while now, and this has just confirmed my worst fears.
Indeed. Inventories contributed 1.45% on the plus side. Basically things shook out this way. Durables were way down, but nondurables and services are still strong. Fixed investment was pretty flat, some components up, some down. Exports didn't contribute much and imports continue to be a drag (see also, nondurables). Government spending, particularly defense spending is down. (Full press release)
So what is with defense spending? Isn't there a war on? Look closely. There was a surge in defense spending in the 3rd quarter followed by a drop in the 4th quarter. The fiscal year ends on Sept. 30.
I'm just sayin'.
So maybe that is just an artifact of budgeting and the timing of the fiscal year. I'm not sure that seasonal adjustments would catch all that, especially if the war causes a lot of unusual spending activity that isn't built into the adjustment process. So one has to think that defense spending and government spending in general will be back up in the first quarter of this year.
But what about durables? What about fixed investment? Is the buildup of inventories troubling? Remember, there was a big draw down of inventories in the 2nd quarter. Perhaps today's data represents part of that ebb-and-flow. If so, and if defense spending goes back to normal, the only really discouraging part of the report is the drop in durable goods. And there's no way to sugar coat that, especially given the announcement by Ford this week (oh, and this report just in concerning GM). If any weakness remains in the first quarter of 2006, that will probably be it.
If you're not too depressed already, go over and read James Hamilton's assessment. He has some links to others as well. King at SCSU Scholars says, "there's no way you can paint this as good news."
While I expect that there might be a small revision upward in the next month or two, I would also revise my 2006 growth estimate down a couple tenths. We're probably looking at the low 2% range, that is unless another shoe drops. Remember, the thing that gets you is the thing you didn't see coming.
There will undoubtedly be some reflection on what all this means for interest rates. The FOMC meeting is next week, and participants are observing the usual pre-meeting "blackout". I don't think it changes anything for Greenspan's last meeting, but after that...
I know we'll all be looking forward to macroblog's implied probability charts. (Link to this week's edition--before GDP data)
UPDATE: Altig's implied probability charts are up. The title of the post is "GDP Tanked...And Nobody Cared." I guess that should tell you that the market still has its chips down on another quarter point rate hike in March. At the moment, the likely candidate for a pause is the May meeting. There will be a lot to talk about between now and then.
Posted by William Polley at January 27, 2006 4:32 PM
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