January 28, 2011

Economics Group

Jay H. Bryson, Global Economist

jay.bryson@wellsfargo.com ł (704) 383-3518

Fourth Quarter GDP Not as Weak as Headline Suggests

The increase in real GDP in Q4 was a bit weaker than expected. However, the headline number was pulled
down by a sharp inventory swing, which lays the groundwork for solid GDP growth in the first part of 2011.

Sharp Inventory Swing Helped to Depress Headline Growth Rate Real GDP
Bars = Compound Annual Rate Line = Yr/Yr % Change
Real GDP rose at an annualized rate of 3.2 percent in the fourth quarter. 10% 10%

The recovery that started in the third quarter of 2009 has transitioned into 8% 8%
an expansion as the level of real GDP is now higher than the pre-downturn
6% 6%
peak in Q4-2007.
4% 4%
On the surface, the fourth quarter’s GDP growth rate was a tad
disappointing as the consensus forecast had anticipated a growth rate of 2% 2%

3.5 percent. However, the headline number belies underlying strength. 0% 0%

Notably, real consumption expenditures shot up 4.4 percent, the strongest -2% -2%
annualized rate of growth in nearly five years. The 21.6 percent surge in
-4% -4%
consumer purchases of durable goods (i.e., “big ticket” items) indicates that
-6% Real GDP: Q4 @ 3.2% -6%
some pent-up demand for durables may have been worked off in the fourth Real GDP: Q4 @ 2.8%
quarter. Although we expect that the growth rate of consumer spending will -8% -8%
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
downshift a bit over the next few quarters, we do not look for consumer
retrenchment á la late 2008 in the wake of the global financial crisis. Inventory Change in GDP
Quarterly Change, Annual Rate, Billions of Dollars
We were a bit surprised by the sluggish growth rate in business fixed $150 $150

investment spending, which was up only 4.2 percent. However, the

$100 $100
apparent slowdown follows two consecutive quarters of double-digit
growth, and we look for growth in capital spending to remain solid in 2011. $50 $50

Exports were another source of strength, rising 8.5 percent during the
$0 $0
quarter. On the other hand, imports fell 13.6 percent, representing some
payback for the 16.8 percent growth rate that was registered in the previous -$50 -$50
quarter.
-$100 -$100
In our view, the most notable feature about the GDP data was the sharp
swing in inventory accumulation. Inventories rose at an annualized rate of -$150 -$150
$121 billion in the third quarter but only $7 billion in the final quarter of Change in Inventories: Q4 @ $7.2B

2010. This dramatic reduction in the rate of stock-building sliced -$200

1997 1999 2001 2003 2005 2007 2009
-$200

3.7 percentage points from the headline GDP growth rate, the largest
negative contribution from inventories in more than 20 years. Real Domestic Final Sales
Bars = Compound Annual Rate Line = Yr/Yr % Change
The economy ended last year on a rather strong note, giving it a fair 8% 8%

amount of momentum entering 2011. Indeed, real final sales shot up

6% 6%
7.1 percent in the fourth quarter. Although this growth rate will likely slow
over the next quarter or two, the economy will probably get some boost 4% 4%

from inventories as the swing in stock-building in the fourth quarter was

2% 2%
very dramatic.
The 3.2 percent growth rate that was reported this morning likely will be 0% 0%

revised as the BEA gets more information about inventories and

-2% -2%
international trade over the next few weeks. However, there is increasing
evidence that the recovery that began in the summer of 2009 is starting to -4% -4%
Final Sales: Q4 @ 7.1%
morph into a self-sustaining expansion. Final Sales: Q4 @ 2.5%
-6% -6%
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Source: U.S. Department of Commerce and Wells Fargo Securities, LLC.

Wells Fargo Securities, LLC Economics Group

Diane Schumaker-Krieg Global Head of Research (704) 715-8437 diane.schumaker@wellsfargo.com

& Economics (212) 214-5070

John E. Silvia, Ph.D. Chief Economist (704) 374-7034 john.silvia@wellsfargo.com

Mark Vitner Senior Economist (704) 383-5635 mark.vitner@wellsfargo.com
Jay Bryson, Ph.D. Global Economist (704) 383-3518 jay.bryson@wellsfargo.com
Scott Anderson, Ph.D. Senior Economist (612) 667-9281 scott.a.anderson@wellsfargo.com
Eugenio Aleman, Ph.D. Senior Economist (704) 715-0314 eugenio.j.aleman@wellsfargo.com
Sam Bullard Senior Economist (704) 383-7372 sam.bullard@wellsfargo.com
Anika Khan Economist (704) 715-0575 anika.khan@wellsfargo.com
Azhar Iqbal Econometrician (704) 383-6805 azhar.iqbal@wellsfargo.com
Ed Kashmarek Economist (612) 667-0479 ed.kashmarek@wellsfargo.com
Tim Quinlan Economist (704) 374-4407 tim.quinlan@wellsfargo.com
Michael Brown Economist (704) 715-0569 michael.brown4@wellsfargo.com
Tyler B. Kruse Economic Analyst (704) 715-1030 tyler.kruse@wellsfargo.com
Joe Seydl Economic Analyst (704) 715-1488 joseph.seydl@wellsfargo.com
Sarah Watt Economic Analyst (704) 374-7142 sarah.watt@wellsfargo.com

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