4th-quarter growth revised downward - Inventory estimates prove too optimistic
4th-quarter growth revised downward - Inventory estimates prove too optimistic
By James P. Miller
Copyright © 2007, Chicago Tribune
Published March 1, 2007
Government officials revised their estimate of the U.S economy's fourth-quarter growth sharply lower Wednesday, to a lackluster 2.2 percent annual rate from 3.5 percent, as initial estimates of U.S. corporations' inventory plans proved overly optimistic.
Although the Commerce Department routinely revises its quarterly estimates of the nation's gross domestic product, Wednesday's markdown was the biggest change in more than a decade, experts noted.
Nonetheless, the new figure was precisely in line with economists' expectations, and it generated little stir on Wall Street or among economists.
The lower GDP reading doesn't represent much of an improvement over the subpar 2 percent annual rate the economy recorded in the third quarter of 2006.
But it did provide additional evidence, if any was needed, that the economy has slowed in response to the Federal Reserve's earlier campaign of interest-rate hikes. The revised data also offered a hint that inflationary pressures might be easing.
The Commerce Department's Bureau of Economic Analysis regularly revises its quarterly GDP calculations, because early estimates, by necessity, include a large amount of guesswork. When the bureau issues its "advance" GDP figure for a given quarter, about a month after the end of the three-month period, officials have a reasonable feel for much of the data from the quarter's first two months but are less sure of the final month.
Why? The process of compiling and analyzing the dense mass of statistics used in figuring the GDP is so time-consuming that the bureau must rely to a significant extent on estimates regarding the quarter's final month.
Later, they fine-tune the data. Approximately two months after a quarter ends, the Commerce Department unit issues what's known as its "preliminary" GDP reading, as it did Wednesday. A month from now, it will issue a final version with even better-massaged data.
Because a raft of economic reports come out between the advance and the preliminary GDP reports, economists can generally fine-tune their own spreadsheets right along with government officials.
Most experts had accurately called Wednesday's revised reading of 2.2 percent. Still, noted Nomura Securities economist David Resler in an interview, "it's not routine for them to move the GDP measure this much" from one month to the next. The government's financial model, he said, proved to be "pretty much off the mark" regarding the final quarter of 2006.
Based on the evidence that housing and capital spending are still soft, Resler said Wednesday that he has lowered his forecast for first-quarter GDP growth to a relatively sluggish 2.1 percent rate from his previous 2.7 percent estimate.
Experts think the economy can grow at a long-term trend of about 3 percent annually. In recent years, GDP growth has topped that rate, though it fell below it in the last three quarters of 2006. Still, there is little evidence the economy's growth will stall outright.
When the Fed launches a full-scale campaign to fight inflation by raising interest rates, the result is always either a slowdown or a recession, noted Ken Mayland of ClearView Economics.
"Obviously, slowdowns are preferred over recessions," he said. "The Fed has to be happy with these results."
The bulk of the government's miss relates to its forecast of the extent to which companies would expand their inventories. A month ago, Commerce Department officials had estimated that inventories grew by $35.3 billion, but on Wednesday that figure was revised to just $17.3 billion.
Companies generally build up their inventory of wholesale products when they think business will be expanding and slow or reverse that buildup when expectations of future marketplace conditions begin to darken.
Consumer demand
The inventory adjustment was the biggest downward drag on the revision, acknowledged Economic Outlook Group economist Bernard Baumohl. But he argues that the more important category to follow is what's known as the "personal consumption expenditures," which strengthened in the fourth quarter.
That increase, he said, indicates that consumers "absolutely" remain in a spending mood. If consumer demand remains strong, as it appears likely to do, Baumohl said, companies will eventually become less cautious and crank up their production.
Barclays Capital economist Dean Maki sounded a similarly cautious positive note, saying "the combination of a surge in final demand, combined with a paring back of inventories, bodes well for growth in the first half of 2007."
----------
jpmiller@tribune.com
By James P. Miller
Copyright © 2007, Chicago Tribune
Published March 1, 2007
Government officials revised their estimate of the U.S economy's fourth-quarter growth sharply lower Wednesday, to a lackluster 2.2 percent annual rate from 3.5 percent, as initial estimates of U.S. corporations' inventory plans proved overly optimistic.
Although the Commerce Department routinely revises its quarterly estimates of the nation's gross domestic product, Wednesday's markdown was the biggest change in more than a decade, experts noted.
Nonetheless, the new figure was precisely in line with economists' expectations, and it generated little stir on Wall Street or among economists.
The lower GDP reading doesn't represent much of an improvement over the subpar 2 percent annual rate the economy recorded in the third quarter of 2006.
But it did provide additional evidence, if any was needed, that the economy has slowed in response to the Federal Reserve's earlier campaign of interest-rate hikes. The revised data also offered a hint that inflationary pressures might be easing.
The Commerce Department's Bureau of Economic Analysis regularly revises its quarterly GDP calculations, because early estimates, by necessity, include a large amount of guesswork. When the bureau issues its "advance" GDP figure for a given quarter, about a month after the end of the three-month period, officials have a reasonable feel for much of the data from the quarter's first two months but are less sure of the final month.
Why? The process of compiling and analyzing the dense mass of statistics used in figuring the GDP is so time-consuming that the bureau must rely to a significant extent on estimates regarding the quarter's final month.
Later, they fine-tune the data. Approximately two months after a quarter ends, the Commerce Department unit issues what's known as its "preliminary" GDP reading, as it did Wednesday. A month from now, it will issue a final version with even better-massaged data.
Because a raft of economic reports come out between the advance and the preliminary GDP reports, economists can generally fine-tune their own spreadsheets right along with government officials.
Most experts had accurately called Wednesday's revised reading of 2.2 percent. Still, noted Nomura Securities economist David Resler in an interview, "it's not routine for them to move the GDP measure this much" from one month to the next. The government's financial model, he said, proved to be "pretty much off the mark" regarding the final quarter of 2006.
Based on the evidence that housing and capital spending are still soft, Resler said Wednesday that he has lowered his forecast for first-quarter GDP growth to a relatively sluggish 2.1 percent rate from his previous 2.7 percent estimate.
Experts think the economy can grow at a long-term trend of about 3 percent annually. In recent years, GDP growth has topped that rate, though it fell below it in the last three quarters of 2006. Still, there is little evidence the economy's growth will stall outright.
When the Fed launches a full-scale campaign to fight inflation by raising interest rates, the result is always either a slowdown or a recession, noted Ken Mayland of ClearView Economics.
"Obviously, slowdowns are preferred over recessions," he said. "The Fed has to be happy with these results."
The bulk of the government's miss relates to its forecast of the extent to which companies would expand their inventories. A month ago, Commerce Department officials had estimated that inventories grew by $35.3 billion, but on Wednesday that figure was revised to just $17.3 billion.
Companies generally build up their inventory of wholesale products when they think business will be expanding and slow or reverse that buildup when expectations of future marketplace conditions begin to darken.
Consumer demand
The inventory adjustment was the biggest downward drag on the revision, acknowledged Economic Outlook Group economist Bernard Baumohl. But he argues that the more important category to follow is what's known as the "personal consumption expenditures," which strengthened in the fourth quarter.
That increase, he said, indicates that consumers "absolutely" remain in a spending mood. If consumer demand remains strong, as it appears likely to do, Baumohl said, companies will eventually become less cautious and crank up their production.
Barclays Capital economist Dean Maki sounded a similarly cautious positive note, saying "the combination of a surge in final demand, combined with a paring back of inventories, bodes well for growth in the first half of 2007."
----------
jpmiller@tribune.com
posted by Carlos T Mock @ 8:42 AM
0 Comments:
Post a Comment
<< Home