Q4 GDP-Adv.

Updated 31-Jan-07 09:14 ET

About this release

Highlights

Advance Q4 GDP grew 3.5%, final sales 4.2%, 1.5% price index.

Key Factors

Personal spending rose 4.4% -- 2nd strongest quarterly growth in two years aided by lower energy costs.
A strong -7% drop in fixed investment as business investment edged lower and residential topped the Q3 decline at -19%.
Business capital investment fell modestly as a small rise in structural investment falled to offset it -- net -0.4%.
The trade deficit provided a 1.6% lift to GDP. Exports surged 10% as lower energy prices left imports down -3%.
Government spending was the biggest surprise with a large 3.7% gain.
Inventory growth was weaker than Q3 to leave an -0.7% drag on GDP growth.
Real final sales (GDP - inventories) rose a strong 4.2%.
GDP price index softened to 1.5%. Core PCE prices expected at 2.1%.

Big Picture

Economic growth rebounded in Q4 despite the stronger drag from housing. The forward risk is that growth will outpace potential growth as the housing effect fades. Lower energy prices aided Q4 growth by boosting consumer spending and slowing imports. 2006 growth was based on moderating consumer spending and the strong decline in housing as slowing business investment was bumpy. 2007 growth will be based on a more stable housing market as consumer and business provide the pace of growth. Inventories are currently overbuilt but adjustments won't be severe. Stimulative fiscal policy contrasts with restrictive monetary policy as economic growth has softened but remains self-sustained. Inflation risk is weakening as the slowed economy helps quell the pressures. Little slack in the economy and remaining inflation risks are the Fed's concerns.

Category	Q4	Q3	Q2	Q1	Q4
GDP	3.5%	2.0	2.6	5.6	1.8
Inventories (change)	$35.3B	$55.4	$53.7	$41.2	$43.5
Final Sales	4.2%	1.9	2.1	5.6	-0.3
PCE	4.4%	2.8	2.6	4.8	0.8
Durables	6.0%	6.4	-0.1	19.8	-12.3
Nondurables	6.9%	1.5	1.4	5.9	3.9
Services	2.9%	2.8	3.7	1.6	2.0
Nonresidential Inv.	-0.4%	10.0	4.4	13.7	5.2
Structures	2.8%	15.7	20.3	8.7	12.0
Equipment & Software	-1.8%	7.7	-1.4	15.6	2.8
Residential Inv.	-19.2%	-18.7	-11.1	-0.3	-0.9
Net Exports	$48.0B	-$5B	$13	$0	-$29
Export	10.0%	6.8	6.2	14.0	9.6
Imports	-3.2%	5.6	1.4	9.1	13.2
Government	3.7%	1.7	0.8	4.9	-1.1
GDP Price Index	1.5%	1.9	3.3	3.3	3.3

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Release Details

GDP: Gross Domestic Product

Importance (A-F): This release merits a B.
Source: Bureau of Economic Analysis, U.S. Department of Commerce.
Release Time: Third or fourth week of the month at 8:30 ET for the prior quarter, with subsequent revisions released in the second and third months of the quarter.
Raw Data Available At: http://www.bea.doc.gov/bea/dn1.htm.

Gross Domestic Product (GDP) is the the broadest measure of economic activity. Annualized quarterly percent changes in GDP reflect the growth rate of total economic output. The figures can be quite volatile from quarter to quarter. Inventory and net export swings in particular can produce significant volatility in GDP. The final sales figure, which excludes inventories, can sometimes be helpful in identifying underlying growth trends as inventories represent unsold goods, and a large inventory increase will boost GDP but might be indicative of weakness rather than strength. The broad components of GDP are: consumption, investment, net exports, government purchases, and inventories. Consumption is by far the largest component, totalling roughly 2/3rds of GDP.

In addition to the GDP figures, there are GDP deflators, which measure the change in prices in total GDP and for each component. Though the consumer price index is a more closely watched inflation indicator, the GDP deflator is another key inflation measure. Unlike CPI, it has the advantage of not being a fixed basket of goods and services, so that changes in consumption patterns or the introduction of new goods and services will be reflected in the deflator.

With both GDP and the deflator, the market tends to focus on the quarter/quarter change. Year/year changes are also cited frequently, though they do not provide the most timely indications of economic activity or inflation. The bond market often reacts to GDP, though the price moves are typically small, as much of the GDP data is easily predicted using monthly economic releases such as personal consumption, durable goods shipments, construction spending, international trade, and inventories.

Quarterly GDP reports are broken down into three announcements: advance, preliminary, and final. After the final revision, GDP is not revised again until the annual benchmark revisions each July. These revisions can be quite large and usually affect the past five years of data.