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GDP Improves for All the Wrong Reasons


Here's some twisted logic for you; 2.7% GDP growth is actually worse than 2.0% growth. While this is clearly wrong mathematically, emotionally and symbolically today's upward revision to the nation's 3rd quarter economic output is actually fraught with risk.

First and foremost, because it's apt to lull some numbskulls into thinking that we're on the right track and moving in the right direction. And secondly, because the number is up for all the wrong reasons. Specifically, the entire bump higher came from a build in inventories, that masked troubling reductions in both consumer and business spending.

Related: Forget Tax Increases and Budget Cuts, Let's Go For Growth

"The inventory increase is a red flag," says Charlie Smith, chief investment officer at Fort Pitt Capital. "It's an indicator that, looking forward, new production may be less than people expect." Smith also points out that durable goods inventories have been rising and corporations have been wary of making big purchases and investments in new equipment in the face of uncertainties surrounding the still unresolved Fiscal Cliff.

Even though the Q3 GDP rate was the best so far this year, it still gets lost on the fact that it came in less than the 2.8% that economists were looking for.

Related: The Five-Year Funk: OECD Slashes Global Growth Estimates

As for the Cliff talks, Smith is among the minority on Wall Street who predict Congress will miss the year-end deadline. As a result, he's waiting - even hoping - for a late December panic sell-off to take advantage when it looks like settlement talks are breaking down. It's a scenario he says is ''increasingly possible'' but also, unfortunately, one that is slowly becoming consensus opinion, "and you never make much money off that."

Related: Ignore GDP and the Fiscal Cliff, U.S. Is Already in Recession: ECRI's Achuthan