Fourth quarter real GDP was revised up but the details indicate that the revisions were not for the good. Real GDP growth for the fourth quarter was revised upward to an annualized 5.9 percent from the initial estimate of 5.7 percent. The market forecast was for a net unrevised second estimate. The higher estimate reflected more positive contributions from private inventory investment, exports, personal consumption expenditures (PCE), and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased. But overall strength for the quarter increasingly was in the inventory component as businesses slowed the pace of destocking. Final sales growth was revised to a more modest 1.9 percent increase from the original estimate of 2.2 percent. Nonetheless, the fourth quarter GDP advance is the second in a row.
The change in real private inventories added 3.9 percentage points to fourth quarter GDP, compared to 3.4 percentage points in the initial estimate. Business inventories fell a modest $16.9 billion, following a sharp $139.2 billion plunge in the third quarter.
Within final sales, there was some strength in investment in equipment & software, posting an 18.2 percent jump, while residential investment advanced 5.0 percent. PCEs rose 1.7 percent in the latest period. Net exports shrank by $10.3 billion with exports spiking 22.4 percent and imports gaining 15.3 percent annualized. Nonresidential structures fell 13.9 percent.
Year-on-year, real GDP improved to up 0.1 percent from minus 2.6 percent in the third quarter.
On the inflation front, the GDP price index was revised down to a 0.4 percent rise, compared to the original estimate of an annualized 0.6 percent. Analysts expected no net revision to the initial GDP price inflation number.
Markets should focus on the downward revision to final sales and this should weigh on equities and help interest rates ease.
Market Consensus before announcement
GDP for the fourth quarter initial estimate showed the economy growing an annualized 5.7 percent. This was the strongest growth rate in more than six years. The fourth quarter gain primarily reflected a slowing in the pace of inventory destocking, a deceleration in imports and an upturn in nonresidential fixed investment. These were partly offset by deceleration in federal government spending and in PCE growth. The bottom line is that overall demand was not as strong as production. Real final sales of domestic product - GDP less change in private inventories - increased 2.2 percent in the fourth quarter, compared with an increase of 1.5 percent in the third. The GDP price index edged up an annualized 0.6 percent after a 0.4 percent rise in the third quarter. Analysts are expecting no net revision to real GDP growth. Components that could tip the balance on revisions are a bigger-than-expected monthly trade gap for December and upward revisions to retail sales.