What The Advance US GDP Isn’t Telling You

Early estimates show that the US economy remained in the “hot” category, as the economy is seen to have grown by 5.6% in the month’s release. This would be close to the advance report, which printed a growth of 5.7%.

Still, as I said in my blog earlier this month, third quarter GDP figures started out pretty hot before revisions were made to show a more modest gain. I also pointed out that it wasn’t consumer spending that boosted the economy, which made me question whether this growth was for here to stay. Let’s take a look at recent developments to see whether economic data supports the forecasts…

It appears that consumer spending, which accounts for about 70% of the US’s total output, remained soft during the last quarter of 2009. Personal spending only grew by 0.6%, 0.7%, and 0.2% in the three months from October to December of 2009. Sales at the retail level also show the same performance with a growth of -0.1%, 1.8%, and 1.1% over the same 3-month period. Like I said before, much of the GDP growth during the fourth quarter can be attributed to the increase in capital investments (equipments, software, etc) and inventories by US firms.

What is not included in the data above, however, is the unexpected 16.4% slide in pending home sales in December, a far cry from the modest 2.3% forecasted decline. Also, the country’s December trade balance, which directly adds up to its GDP, showed a worse than expected deficit of $40.2 billion versus the $35.8 billion forecast. November’s tally also printed a wider deficit of $36.4 billion against the -$34.0 billion estimate. Given these new sets of data, we may just see the upcoming preliminary GDP report come in weaker than December’s advance score.

Judging from how the dollar has been reacting to positive and negative data lately, I think regardless if we see weak or strong GDP figures, we may still see a bias towards the dollar. On the one hand, better-than-expected figures would suggest that the US economy is fundamentally strong, solidifying the speculation that recovery is sustainable. Considering how badly European countries have been faring, this makes the US dollar highly attractive in comparison.

On the other hand, weaker-than-expected data could give rise to risk aversion, which would also benefit the dollar. Remember, the dollar is considered a safe-haven currency, and investors tend to unwind their carry trade positions during times of economic uncertainty.

But, let’s say the US preliminary GDP enjoys a huge upward revision, I’ll pull a Ben Bernanke on you and caution that his recovery might not be self-sustaining just yet. In yesterday’s post, I mentioned that US consumers seem to have lost their swagger mainly because of employment concerns. Now, if the average Joe constantly worries about holding on to his job and is unsure whether he’d have a steady supply of cash later on, wouldn’t he rather keep his hands in his pockets?

This downbeat consumer sector is certainly worrisome for the entire US economy since consumer spending comprises more than two-thirds of the nation’s GDP. Apart from that, the recent discount rate hike by the Fed could result to tighter credit conditions, which means that consumers like you would find it a tad more difficult still to secure loans. Given this, I’ll go out on a limb here and say that even extraordinarily strong GDP growth for the fourth quarter will not deter the Fed from keeping its benchmark interest rate low for an extended period of time…