Today's GDP Revision Is the Worst of All Worlds
From the Buzz & Banter: The economy isn't doing as well as we thought.
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The revised fourth-quarter GDP came in pretty much as expected. I am told that economists have the easiest time estimating the revised GDP because they have the original number, and the data that comes out after the initial release has a fairly straightforward, formulaic impact on GDP. So they can plug those details into their models and get it about right, which they did this time since it came in at 2.4% versus expectations of 2.5%.
Clearly the market has priced in the big reduction from initial estimates, but I couldn't help but look back to January 30 when they were published. The e-mini S&P (INDEXSP:.INX) future was sitting right around 1,776 a little before 8:30 a.m. It popped almost 10 points on the number, and by the time shorts were squeezed out, had hit 1,794. We can never go back in time, but I wonder what the trading would have looked like had we gotten a 2.4% print back then rather than 3.2%?
But anyway, I am not going to focus on the headline number as it was largely expected.
What I don't like are the details that came with it.
Not only was Q4 materially slower than Q3, but the data was all wrong. Personal consumption dropped from the initial estimate and was only 2.6%. It missed the already downgraded estimates. But again, this isn't my big concern.
What I don't like is that the GDP Price Index was up to 1.6%, and even the core PCE inflation was up 1.3%. I am really not sure why the Fed is so keen on pushing the PCE up to 2.0%, but I think this revised data is the worst of all worlds. The economy isn't doing as well as we thought, or as well as it had been doing. The consumer is part of that slowdown, which is not good. Finally, and potentially most dangerous, is that inflation is creeping higher.
Will the Fed get its goal of higher inflation without a corresponding uptick in real growth? That is when it starts to lose control.
This report isn't horrible, but I don't like the details at all.
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