4Q GDP Revised Down on Inventory De-Stocking, Inflation Measure Decelerates, Chicago PMI Declines, New Home Sales Fall

- Preliminary 4Q GDP rose 2.2% versus estimates of a 2.3% gain and a prior estimate of a 3.5% increase.
- Preliminary 4Q Personal Consumption rose 4.2% versus estimates of a 4.2% increase and prior estimates of a 4.4% gain.
- Preliminary 4Q GDP Price Index rose 1.7% versus estimates of a 1.5% gain and prior estimates of a 1.5% increase.
- Preliminary 4Q Core PCE rose 1.9% versus estimates of 2.1% and prior estimates of a 2.1% increase.
- The Chicago Purchasing Manager for February fell to 47.9 versus estimates of 50.0 and a reading of 48.8 in January.
- New Home Sales for January fell to 937K versus estimates of 1080K and 1123K in December.

BOTTOM LINE: The US economy grew at an annual rate of 2.2% in the fourth quarter, slower than first estimated, as companies stepped up efforts to curb inventories, Bloomberg reported. For all of last year, the US economy grew at an above-average 3.3% versus a 3.2% gain in 2005. Inventory de-stocking was the main reason for last quarter’s reduced growth rate. Companies added to inventories at an annual rate of $17.3 billion versus a $35.3 billion pace reported Jan. 31 and a $55.4 billion rate reported in 3Q. The decline took away 1.35 percentage points from GDP. The core pce, the Fed’s favorite inflation gauge, rose 1.9% y-o-y last quarter versus a 2.1% prior estimate. Incomes grew at a 4.8% annual pace during 4Q, more than twice most measures of inflation. I continue to expect significant inventory de-stocking to result in below trend 1Q GDP growth. However, subsequent quarters should see a boost from inventory rebuilding as companies gain confidence in the sustainability of the current expansion as demand remains relatively robust.

A gauge of US business activity unexpectedly fell for a second month as companies curbed production, Bloomberg reported. However, the New Orders component of the index rose to 48.7 from 46.3 the prior month. The Prices Paid component rose to 63.2 versus 54.9 the prior month. The Employment Component of the index surged to 50.6 versus 42.8 the prior month. I expect this gauge to show expansion next month.

New-home sales in the US fell last month more than expectations, Bloomberg reported. The median price of a new home fell to $239,800 from $244,900 a year earlier. The supply of new homes at the currents sales pace rose to 6.8 months’ worth versus 5.7 months the prior month. New Home sales fell 37.4% in the West, 18.7% in the Northeast, 9.7% in the South and 8.1% in the Mid-west. The NAR reported yesterday that Existing Home Sales, which account for about 85% of the market, unexpectedly rose 3% last month. As well, weekly mortgage applications rose 3.2% this week. While I continue to believe housing is stabilizing at relatively high levels, construction will remain muted throughout the year as homebuilders continue to work down inventories.