HIGHLIGHTING THE RISKS TO GDP GROWTH IN 2011

The sequential improvement in 4Q10 GDP growth from 3Q came to +0.62%.   On the margin, this is a positive and it is important to note that net trade accounted for +5.1% of the sequential change in GDP growth for the quarter.  A significant inventory drawdown was the opposing big ticket item on the list, going from a contribution to GDP growth of +1.6% in 3Q to -3.7% in 4Q, thereby dragging the quarterly sequential change in growth by -5.3%. 

A noteworthy point to consider in the 4Q10 data is that the narrowing of the trade deficit contributed 3.4% to GDP growth, which ended up growing by a net +3.2%.  The 3.4% estimate is from the BEA and is based on two months of available data.  Given the time-honored tradition of government massaging of the data, I would submit that it is highly likely that the advance estimate will be revised at the end of each of the next two months.  The 4Q09 advance estimate ended up being high by 0.7% after all revisions were complete.  Clearly, if history is any guide, there is revision risk to the downside of 4Q’s GDP growth number.

Consistent with the “we see no inflation” theme in Washington, the reported inflation-adjusted (Real) annualized growth rate of +3.17% benefited from a relatively low annualized inflation assumption of +0.3% for the quarter, down from +2% in 3Q10.  This compares to the current inflation estimates, including the December year-over-year CPI numbers of +2.6% (up from +1.5% in 3Q10) and the PPI finished goods numbers for December of +4.0%.  Needless to say, a more realistic view of inflation would significantly diminish the +3.17% GDP growth the data currently shows if the +0.3% deflator proves optimistic.

There are also other potential red flags that need to be monitored:

  1. After five quarters of a significant inventory build-up, a reduced pace of relative inventory increase reduced the reported real fourth-quarter GDP growth rate by 3.70%.  This will continue to be a BIG headwind for 2011. 
  2. The net growth of Governmental spending has also reversed.  Governments on a local level are tightening their belts given the fiscal realities they are facing and electoral mandates they have been given to do so.  Whatever one’s political ideology, the political environment in Washington and the fiscal scorecard point to the trend in Government spending remaining a drag for some time to come.  This is in line with our Hedgeye Macro Q1 theme, American Sacrifice.
  3. After five quarters of being a drag, the quarter-to-quarter contraction in the quantity of imported goods and services was a net sequential positive of +4.9% to GDP growth.  The recent rapid increase in commodity prices (read: debauchery of the dollar) has caused a correspondingly rapid decrease in reported imports. Going forward, the sharp rise in commodity prices will limit the purchasing power of the consumer. If the 33% swing in the quarter-to-quarter price of imported goods is correct, real discretionary consumer spending could be in for a significant change in trajectory.
  4. About +0.83% of GDP growth came from a recovery in residential housing investment, which is reportedly now growing at a tepid +0.08% annualized rate. This was the second positive quarter for residential housing investment during the year, but only the third over the past four years.  With housing prices in a continued decline this will unlikely persist. 
  5. Consumer spending was reported to have strengthened by about +1.3%, with consumer goods now being shown to have an annualized growth rate of 2.26%.

Howard Penney

Managing Director

HIGHLIGHTING THE RISKS TO GDP GROWTH IN 2011 - gdp