Breakout

Federal Spending, Rising Inventories Mask Much Weaker Economy

Breakout

It's only the third time in the past twenty quarters that GDP has come in above 3%. You'd think the "hallelujahs" would be heard far and wide on hopes that maybe we're finally turning the corner on a half-decade that's been plagued by sub-par growth and recession.

Unfortunately, that's not the case though, as markets and economists alike knew immediately that there was more to the story than a positive 3.1% headline number suggests.

"It's an encouraging sign, but I wouldn't get too excited about it," says Kevins Cummins, senior U.S. economist at UBS, in the attached video. "It is a bit backward looking and a bit dated," he says of the report on growth from July, August and September.

Officially, the third and final report on Q3 GDP from the Commerce Department shows that 0.7% of the gain came from inventories, and that without it "real final sales of domestic product -- GDP less change in private inventories -- increased 2.4%," as the press release from the Bureau of Economic Analysis states. Add in a 9.5% increase in federal government expenditures, and you hit your headline number.

"You don't want (inventory build) because it will have to be worked off and cut production going forward," Cummins explains, noting that the initial GDP report started out at 2%, then got revised once to 2.7%, before ending up where it did today at 3.1%.

Going forward, there are a few things that most economists are expecting from the fourth quarter growth figure, including disruptions from Hurricane Sandy as well as impacts from fiscal uncertainty. From his standpoint, growth in Q4 is pegged to come in at about a 1% annualized rate, which Cummin says indicates that ''the trend in GDP growth is still closer to 2% than it is 3%."

"We saw a big pullback in capital expenditure spending, as well as confidence, among business decision makers in the second half of this year. So clearly, the fiscal cliff was on the minds of businesses for some time," he says, noting that this pessimism didn't spread to consumers until December, as reflected by the weak Michigan confidence numbers released two weeks ago.

For the record, the first reading on 4th quarter GDP will be announced January 30th, which coincidentally is the same day that the Federal Reserve concludes its next round of scheduled talks.

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