US Economic Growth Surges Back to Above-Average Rates, Inflation Decelerates Further, Consumption Healthy, Chicago PMI Contracts, Construction Muted

- Advance 4Q GDP rose 3.5% versus estimates of a 3.0% gain and a 2.0% rise in 3Q.
- Advance 4Q Personal Consumption rose 4.4% versus estimates of a 4.4% gain and a 2.8% rise in 3Q.
- Advance 4Q GDP Price Index rose 1.5% versus estimates of a 1.5% increase and a 1.9% gain in 3Q.
- The 4Q Employment Cost Index rose .8% versus estimates of a 1.0% gain and a 1.0% increase in 3Q.
- The Chicago Purchasing Manager for January fell to 48.8 versus estimates of 52.0 and a downwardly revised reading of 51.6 in December.
- Construction spending for December fell .4% versus estimates of unch. and an upwardly revised .1% gain in November.

BOTTOM LINE: The US economy grew at a faster-than-forecast annual pace of 3.5% last quarter, propelled by a rebound in consumer spending as gasoline prices fell and wages grew, Bloomberg said. The US economy grew an above-average 3.4% for all of 2006. The GDP Price Index rose at an annual rate of 1.5%, the smallest gain in more than 3 years, suggesting inflation is well contained, notwithstanding above-average growth. Consumer spending, which accounts for 70% of US economic growth, rose 4.4% last quarter versus a 2.8% increase the prior quarter. A smaller trade deficit also boosted growth as it added 1.6 percentage points to GDP, the most in 10 years. Inventory de-stocking subtracted .7 percentage points from growth. I believe U.S. GDP growth averages 3.0% this year as housing and auto-related weakness subsides and the deflator subtracts less from nominal growth as inflation continues to decelerate.

The Chicago Purchasing Manager Index unexpectedly contracted for the first time since April 2003 as new orders fell, Bloomberg reported. A gauge of order backlogs rose to 46.4 versus 44.5 in December. As well, the production index rose to 53.2 from 49.7 the prior month. The employment component of the index fell to 42.8 from 48.2 prior. The prices paid component fell to 54.9 from 56.9 prior. I continue to believe manufacturing will trend higher throughout the year as the effects of auto production and housing subside.

Construction spending in the US fell in December, Bloomberg reported. Private residential building fell 1.6%, the ninth straight decrease. Private non-residential construction rose .9% in December and surged 14.5% from year-ago levels. Homebuilding construction will remain muted throughout the year. This will result is a dramatic decline in housing inventories as demand is still relatively healthy.