Forbes is reporting Q4 GDP growth up 0.6 pct vs expected 1.2 pct, slowest since 2002 .

The US economy slowed more dramatically than expected in the final three months of last year as housing posted its worst contraction in a quarter century, exports pulled back and inflation picked up steam, the Commerce Department reported today.

The economy grew at a 0.6 pct annualized pace in the fourth quarter, half the expected 1.2 pct pace of economists polled by Thomson’s IFR Markets.

Business inventories were the big surprise in the GDP report. They went from being a major source of strength in Q3 to a major weakness in Q4, declining by 32.9 bln usd, after a 24.7 bln usd increase.

My Comment: After that 3rd quarter totally unwarranted buildup in inventory, the only surprise here is that everyone is surprised.

Briefing.com’s Dick Green thinks the low GDP number is not unmitigated bad news. ‘Even though the lower than expected number will give recession advocates some talking points, the swing in inventories actually sets up the first quarter numbers for a better reading,’ he said. ‘Inventories over time essentially net out, and it is now more likely that inventories will add to first quarter GDP or at least not subtract much. The sharp drop in fourth quarter inventories may actually lead to upward revisions to first quarter GDP.’

My Comment: Assuming the 3rd and 4th quarter balance out, there is no need to rebuild inventory in 1st Quarter of 2008. Look for another surprise when the 1st quarter disappoints again.

Exports, which had been among the biggest drivers of GDP growth in the third quarter, with what some economists saw as an unsustainable 19.1 pct increase, slowed to a much more moderate 3.9 pct increase in the fourth quarter.

My Comment: So much for both the decoupling theory and the theory that strong exports will prevent a recession.

Consumer spending, which makes up roughly 70 pct of the US economy, rose 2.0 pct last quarter, slower than the 2.8 pct rate in prior quarter.

‘Looking ahead to Q1 GDP data, it is likely that consumer spending growth will slow considerably,’ said Shapiro. ‘The biggest question will be the degree of slowdown in consumer spending.’

My comment: Bingo. And with Wal-Mart Reducing Prices and Offering 0% Interest the preliminary signs are spending will be exceptionally weak. I am looking for prices wars across the board in the battle for consumer discretionary spending.

Housing’s drag on the economy became more pronounced, with a 23.9 pct decline in the fourth quarter, the steepest drop since the recessionary fourth quarter of 1981.

Business construction, although strong with a 15.8 pct rise, was not enough to offset the housing and inventory contractions.

My Comment: Business construction will collapse. In the face of a strong consumer pullback, continued expansion would go beyond reckless. We simply do not need any more stores of any kind and rampant price cutting and 0% interest rates should be proof enough.

Final sales in the US economy also slipped last quarter to 1.9 pct growth from 4.0 pct in the third quarter, but because they exclude the inventory decline, final sales can be a better indicator of actual domestic demand.

My Comment: Final sales are not remotely keeping up with price inflation.

Those looking in the rear view mirror for price inflation and attempting to short treasuries with impunity are going to find the answer to the question Time To Short Treasuries? is not exactly what they thought.

Gross Domestic Product: 4th Quarter 2007 (Advance)

Looking ahead at official BEA GDP Release, one can find additional clues where things are headed in 2008. Let’s take a look.

The major contributors to the increase in real GDP in 2007 were personal consumption expenditures (PCE), exports, nonresidential structures, and state and local government spending. These positive contributions were partly offset by decreases in residential fixed investment and in inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP primarily reflected a larger decrease in residential fixed investment, a downturn in private inventory investment, and a deceleration in equipment and software that were partly offset by a deceleration in imports.

Major Contributors To 2007 Growth

  • Personal consumption expenditures
  • Nonresidential structures
  • State and local government spending

All of the above are going to contract in 2008.

Consumers are retrenching, Unemployment is Soaring as Private Sector Jobs Contract, and with Grim News For State Budgets states are tightening belts. California alone is facing an across the board 10% reduction in spending.

There are going to be some tough choices for California for sure but here is my California Budget Proposal. Regardless of how cutbacks are accomplished, the upcoming pullback in state and local spending cuts have nowhere near been factored into the equation by most economists.

European Retail Sales Contract

Things are not exactly booming in Europe either as European Retail Sales Drop a Fourth Month.

European retail sales fell for a fourth month in January as rising fuel, utility and food prices left shoppers with less money to spend, the Bloomberg purchasing managers index showed.

The gauge of sales in the euro region was a seasonally adjusted 48.1, compared with 46 in December. A reading below 50 indicates a decline. The index is based on a survey of more than 1,000 executives compiled for Bloomberg News by NTC Economics Ltd.

A 62 percent increase in oil prices over the past year is sapping spending power already hit by rising food costs, curbing demand for everything from Bang & Olufsen A/S televisions to Burberry Group Plc handbags.

Is Oil To Blame?

Blaming oil and/or food prices for the slowdown in retail sales makes little sense given that oil and food prices are components of retail spending. A better way of looking at things is that consumer attitudes towards consumption have changed.

Paying Tribute To Employees

One reason attitudes are souring has to do with how companies are treating employees. Here is just one small example. Consider Allergan, a US pharmaceutical company.

US pharmaceutical company Allergan will phase out work at its factory in Arklow, south of Dublin, over two years and transfer operations to Costa Rica.

General manager of the Allergan plant Paul Moody paid tribute to the workers and thanked them for their dedication.

Allergan is “paying tribute to employee dedication” by firing them for a job well done.

More and more companies seem to be saying: Don’t take it personal, it’s just business. Is it any wonder “The Business Of Walking Away” is booming? Have we now reached the point where everything we do is just a business decision?

While pondering the above, remember that Wal-Mart is not lowering prices out of the goodness of their hearts, they are lowering prices because supply outstrips demand at current prices. More businesses will be forced to do the same.

Look for price wars to commence and margins to shrink as the corporate battle for consumer discretionary spending begins.

Mike “Mish” Shedlock
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