US GDP Report: Growth Curbed by Huge Swing in Inventories

by Marc Chandler

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At 3.2% the Q4 US GDP came in a bit lower than expected. Inventories were the main reason for the miss. In terms of inventory, the key is the change in the change. Inventories rose a little more than $7 bln in Q4 after a $121.4 bln rate in Q3. This subtracted 3.7 percentage points from growth–the most since the late 1980s. Final sales, which is GDP minus inventories rose 7.1%, the most since 1984. Final sales domestically rose 3.4%. Another notable takeaway is that the US economy has surpassed the pre-crisis peak. This is to say US GDP in real terms has never been greater.

Personal consumption rose 4.4%, the most since Q1 2006. Residential construction rose at a 3.4% pace. Equipment and spending rose 5.8%, the smallest in five quarters. Net exports added 3.4% to GDP, offsetting the lion’s share of the drag 3.7 percentage drag by inventories to GDP.

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The initial market reaction was to take the dollar and bonds lower. However, provided the euro holds the $1.3680 area, the euro bulls may still retain the upper hand. Support for sterling is seen near $1.5850. The dollar may recover against the yen, provided the JPY82 level holds.

The main caveat with the data is that it is preliminary and the Dec trade and inventory data has yet to be reported and the government makes an estimate of it. That makes these upcoming reports exceptionally important for GDP calculations. If the general pattern is retained, it may encourage economists to revise up H1 GDP estimates as inventories are rebuilt.

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