Reduced Inventories and Negative Net Exports Pulled Down Fourth Quarter G.D.P. Growth Compared to Consensus
The government’s fourth quarter advance estimate of real gross domestic product (G.D.P.) increased at an annual rate of 2.6%. This headline number compares to consensus estimates of about 3%. Reduced inventories and net exports pulled the number down. Personal consumption expenditures showed strong growth of 3.8% in the quarter and help explain an inventory decline of 0.7%.
Underlying Numbers Show Great Strength
However, the underlying numbers showed great strength. We always look to real end demand to determine the strength of the economy. Specifically, final sales to private domestic purchasers showed a quarterly increase of 4.6%. That number simply shows the growth of sales over the counter — so to speak. The 4.6% increase represented the fatest quarterly rate in over three years. Other items of interest include a quarterly increase of 11.7% for residential investment and 6.8% for non-residential investment.
The strong fourth quarter underlying G.D.P. results should support continued economic strength carrying over through the first half of this year. That economic strength should enable the Fed to increase the Fed funds rate by 0.25% in March as well as in June. Overall, we continue to expect the Fed to be more aggressive with Fed funds rate increases than most investors expect. If we prove correct, then we will likely see the Fed funds rate increased four times this year.
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