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Markets Fading the 4th Qtr GDP Report

Posted by Larry Doyle on January 29, 2010 2:55 PM |

The 4th quarter GDP report came in this morning at a surprisingly strong 5.7%. However, like many other things in this Uncle Sam economy, not everything is as it appears. For that very reason, I wanted to wait to write about this report until I monitored the market’s reaction. Let’s navigate.

The question for the economy, and in turn the markets, is to what degree the supposed growth embedded in the 4th quarter GDP is sustainable. To determine that, people need to appreciate the fact that this 5.7% GDP figure was driven to a large extent (60%) by a slowing in the drawdown of inventories. Are you scratching your head wondering what that means? Let’s just reduce it to the fact that drawing down inventories is not exactly a driver of growth at all.

What drives growth? Personal consumption. What drives personal consumption? Jobs.

The American consumer represents approximately 70% of the economy. Consumption added approximately 1.4% to the 5.7% GDP figure. That is not exactly a robust reading. In fact, overall personal consumption declined in the 4th quarter, down from the heavily government aided 3rd quarter report.

Bloomberg offers a comprehensive assessment of 4th quarter GDP in writing, U.S. Economy: Growth Jumps 5.7%, Fastest Pace in Six Years. Can the growth be sustained? Some economists believe so:

“We are getting on to something that is pretty sustainable,” said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York, who correctly forecast the gain in GDP. “Both consumers and businesses are beginning to increase spending. To get validation, we need to see a return in hiring, which we think we are going to get over the next few months.”

While I would hope Kasman is right, I am less sanguine and it would seem the markets are as well. Throughout the morning, most major equity market averages were up .5-1%, but they have since retreated and are now down .5-1.5% and would seem to be setting themselves up for a weak close to a weak month. Not exactly a resounding vote of confidence that the supposed growth will be sustained.

What about commodities? Uh-oh . . . down again. The overall DJ-UBS Commodity Index is down another .8% and if it were to close at the current level would end the month down 7+%. What about copper? I have focused on the negative price action within this specific market all week. Copper is ‘melting down’ again today. How so? This base metal is down another 1.5%.

I remain convinced that as government supports for the markets and economy both here and abroad lessen, 2010 will be a year filled with an ongoing uphill climb.

For further insight and analysis of the economy, please join me this Sunday evening as No Quarter Radio’s Sense on Cents with Larry Doyle Welcomes John Ryding. Who is John Ryding?

John Ryding, perhaps the most highly regarded economist on Wall Street, is the Chief Economist and a founding partner of RDQ Economics.

John was at Bear Stearns from 1991 to 2008—-most recently as the Chief U.S. Economist–where he was responsible for analyzing and forecasting U.S. economic trends and monetary policy. Prior to joining Bear Stearns, he was a Senior Economist at the New York Fed from 1989 to 1991 and an Economic Advisor to the Bank of England, where he worked from 1980 to 1989.

John graduated Sidney Sussex College, Cambridge, England in 1980. John is a frequent commentator on Bloomberg, CNBC, CNN, Fox Business News and the BBC.

I hope you will be able to listen in as John Ryding will certainly help us navigate the economic landscape.


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