At 2.8% fourth quarter 2011 GDP growth disappoints--and now we can see what the Fed fears

01/27/2012 5:36 pm EST


Jim Jubak

Founder and Editor,

Is this what the Federal Reserve saw in the fourth quarter GDP numbers that made it pessimistic enough on Wednesday to say that exceptionally low interest rates will be with us until the end of 2014 instead of “just” the middle of 2013?

I’m not talking about today’s headline GDP number, although that was disappointing. The “advance estimate”  (the first estimate and subject to future revisions) showed real GDP climbed at an annual rate of 2.8% in the fourth quarter of 2011. That was below the consensus among economists surveyed by of 3.2%. But well above the 1.8% annual growth recorded in the third quarter of 2011. Fourth quarter growth was the strongest since the second quarter of 2010.

But 2.8% was still disappointing because in recent weeks economists and Wall Street had pushed their expectations above 3% to as high as 3.5% for the quarter.

The real problem with this number is where the growth came from and what that forecasts for the first quarter of 2012.

Personal consumption climbed by 2% and residential fixed investment (houses) was up 10.9%. These two factors added 1.45 percentage points and 0.23 percentage points to growth, respectively. (A drop in federal government spending, a larger than expected drop in state and local government spending, a deceleration in nonresidential fixed investment (commercial construction), and an acceleration in imports all lowered GDP growth.)

But the biggest positive factor in the fourth quarter was an increase in private inventories of $58 billion from the third quarter. Inventory growth contributed 1.94 percentage points to the fourth quarter’s 2.8 percentage points of growth.

And that’s worrying for growth in the first quarter of 2012. Companies that add inventory in one quarter don’t add more in the next quarter unless they’ve sold down that inventory. So, the thought goes, the first quarter of 2012 won’t get a boost from an increase in private inventories anything like that seen in the fourth quarter. And GDP growth might even take a hit if companies don’t sell down their inventory and then buy more to restock.

If you were looking to see why the Fed said on Wednesday that fourth quarter 2011 growth might not extend into 2012, you don’t have to look much further than this.

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