GDP increased by a paltry 0.6% in the 4th quarter of 2007 according to the Bureau of Economic Analysis. But there are reasons to be guardedly optimistic. First, real final sales were up 1.9%. Residential investment may be in the tank but households continue to consume at a steady pace. Obviously the major reasons for the low GDP number were the decline in residential investment and the decline in inventories. The decline in inventories, however, is not all bad. This means that producers may have already been slowing production on the expectation of falling demand. If there are further drops in demand, the adjustment may be smaller and smoother. If a drop in consumption doesn't materialize, production will need to increase to build up the inventories again.
James Hamilton's take on the inventory picture is similar. King Banaian at SCSU Scholars is less optimistic. He notes that the inventory/sales ratio has been in decline for some time and that if this was planned that it doesn't imply a turnaround in the current quarter.
Perhaps not. Perhaps the support provided by the consumer will weaken (but that's what the stimulus is for, right?). This report doesn't give us those kind of answers. We now await the employment report, which, according to some, might be better than you think.
My metric of choice is Social Security receipts which would seem to be an excellent proxy for real wage and indirectly for employment. As a bonus the Treasury tracks them to the penny and the reporting lag is only a month.
Short version: October was strong with the Trust Funds both on track to exceed year end dollar projections. November kind of stalled, DI already beating year end, OAS still trailing. December? Not so good. DI held dead steady, OAS coming in slightly behind Intermediate Cost projections, and combined OASDI splitting the difference between Low Cost and Intermediate Cost.
Taking the narrow issue of Social Security solvency things still look optimistic but clearly there was a slowdown in wages late in the year. I am generally pretty bullish on the American economy and I do believe people are mis-reading some signals on housing, but I am not optimistic about the next two quarters.
Because as you know by now that job number dropped the other shoe.