4Q GDP Rises Less-Than-Estimates, Mortgage Applications Surge Again, ADP Employment Above Estimates

- Advance 4Q GDP rose .6% versus estimates of a 1.2% gain and a 4.9% increase in 3Q.

- Advance 4Q Personal Consumption rose 2.6% versus estimates of a 2.0% gain and a 2.8% increase in 3Q.

- Advance 4Q GDP Price Index rose 2.6% versus estimates of a 2.6% increase and a 1.0% gain in 3Q.

- Advance 4Q Core PCE rose 2.7% versus estimates of a 2.5% increase and a 2.0% gain in 3Q.

BOTTOM LINE: The US economy grew less-than-expected in the fourth quarter, Bloomberg reported. Home construction fell 24% last quarter, the eighth consecutive drop, which subtracted 1.2 percentage points from growth. The GDP deflator rose 2.5% versus a 1.0% increase the prior quarter. Consumer spending contributed 1.4 percentage points to growth during the fourth quarter. Business spending rose at a 7.5% pace. An unexpected drop in inventories was one of the main reasons growth wasn’t stronger during the quarter. Inventories fell at a $3.4 billion annual rate, the largest drop in almost six years, which subtracted 1.3 percentage points from growth. For all of 2007, international trade contributed .55 percentage points to growth, the greatest since 1991. I expect GDP growth this quarter to accelerate modestly on inventory rebuilding and a smaller increase in the deflator.

MBA mortgage applications jumped another 7.5% this week, led by a 22.2% surge in re-financings. The four-week average of re-financings is at the highest level since April 2004 as mortgage rates continue to plunge. The ADP Employment change for January was +130,000 jobs versus estimates of +40,000 and +37,000 in December. I suspect this Friday’s January employment report will modestly exceed estimates of +65,000. According to Intrade.com, the odds the US enters recession this year have fallen from 77.5% to 59.9% over the last week. I continue to believe the overwhelming majority of investors have already priced a recession into most stocks, despite the fact that most datapoints indicate slow growth, not a recession. Fed fund futures now imply a 74.0% chance for a 50 basis point rate cut and 26.0% chance for a 25 basis point cut today.