A Strong Fourth-Quarter GDP Report Looms, Setting Base for Double-Dip. Briefing.com shows a 4.2% consensus estimate for next Friday’s (January 29th) "advance" estimate of annualized, real (inflation-adjusted) fourth-quarter 2009 GDP, with some forecasts ranging up to 6%. Such is up from 2.2% in the latest reporting for third-quarter GDP and sharply against my early expectations of a renewed contraction, although renewed contraction still looms for the official GDP series. The consensus estimate usually sets the tone for the initial estimate of reported quarterly GDP growth, so the report likely will be strong, although I would look for something weaker than consensus in actual reporting. Going against a 5.4% annualized drop in fourth-quarter 2008, some seasonal factors — as seen in fourth-quarter retail sales reporting — likely will be skewing adjusted growth to upside, offsetting negative economic patterns instead of regular seasonality patterns.

A number of series have bottomed out, showing activity bouncing along a low-level plateau of activity, as just seen in the December housing starts, discussed below. Shy of bad seasonals, real retail sales would not be showing any quarterly gain, mirroring fully instead the housing starts pattern. Industrial production was up for the quarter, but without offsetting demand, that means unwanted inventories are building up. With two months of the fourth-quarter trade deficit in hand, that factor should be a small negative for the GDP. Employment still is in contraction and subject to massive downside benchmark revision, but the implications there for GDP likely will not be seen until the annual GDP revision in July.

Irrespective of whatever growth is reported initially for fourth-quarter GDP, the U.S. economy is not booming, and the fourth-quarter GDP likely will be the base against which a second- or double-dip downturn will be measured (see Commentary No. 268 of December 30th).  GDP, as with key underlying series, should be showing some bottom-bouncing at present — flat for both the third- and fourth-quarter 2009 — and it is poised for a renewed downturn. 

Average real annualized quarterly GDP growth over the last 30 years has been 3.2%, which is considered a normal and healthy level. Consensus growth of 4.2% would be considered strong, and forecasts being touted near 6% for the quarter would be considered an economic boom. Even with bad seasonal factors boosting fourth-quarter retail sales, such growth is not in place. The only factor that conceivably could support such growth rates would be an extraordinary involuntary buildup in inventories, meaning that stronger production has not been matched by stronger consumption, but even so, production has not been that strong. A sharp inventory buildup, however, would be consistent with renewed economic downturn in the first-quarter 2010.

Also keep in mind, though, that the headline numbers here are annualized.  The 2.2% gain reported for third-quarter was roughly 0.5% not annualized. Likewise a 4.2% to 6.0% fourth-quarter GDP would be in 1.0% to 1.5% range not annualized.

The GDP is the most heavily rigged and politicized series put out by the government. One reason this happens is that the data in early reporting are not hard; they simply are guesstimates and easily influenced. The tendency of the Bureau of Economic Analysis is to target the consensus forecast in its advance reporting. Consensus GDP forecasts in times of uncertainty, however, rarely have a good track record of accuracy net of later historical revisions.

Annual PPI Inflation Surged Still Further into Positive Territory. As reported by the Bureau of Labor Statistics (BLS) this morning (January 20th), the regularly-volatile, seasonally-adjusted producer price index (PPI) for finished goods rose month-to-month by 0.2% (unchanged on an unadjusted basis) in December, following November’s 1.8% (1.2% unadjusted) monthly gain.

Year-to-year, December’s annual PPI inflation jumped sharply, again, to 4.4%, the highest annual inflation rate since October 2008, following November 2009’s 2.4% annual gain. Going against the pressures of collapsing oil prices in fourth-quarter 2008, year-to-year change in PPI inflation has returned to positive territory and should continue to increase in the months ahead.

Annual PPI inflation averaged a 2.5% contraction in 2009 against a 6.3% average gain in 2008. December over December inflation, again, was 4.4% in 2009, versus a 0.9% annual contraction for December 2008.

On a monthly basis, seasonally-adjusted December intermediate goods rose by 0.5% (up by 1.4% in November), with crude goods up by 1.0% (up by 5.7% in November). Year-to-year inflation was up across-the-board, with December intermediate goods up by 3.0% (down by 1.6% in November) and December crude goods up by 12.3% (up by 4.7% in November).

Bottom-Bouncing Continued in December Housing Starts. The Census Bureau reported today (January 20th) that December housing fell month-to-month by a statistically-insignificant 4.0% (down by 3.0% net of revisions) +/- 11.1% (95% confidence interval). November’s starts were revised (along with a downside revision to October) so as to show a 10.7% monthly gain, after initially having been reported up by 8.9%. Going against December 2008’s monthly collapse of 15.1%, year-to-year change was up by 0.2% in December (consistent with protracted bottom-bouncing), following a revised annual contraction of 11.5% (previously 12.4%) in November.   

Since December 2008, housing starts have been bottom-bouncing at an historically low level, averaging a seasonally-adjusted annual rate of 552,300. In the past 13 months, all monthly readings have been within the normal range of monthly volatility for the series around that average, including December’s reading of 557,000, which remained below the monthly readings of June through September, inclusive.

The "recovery" in housing is shown in the above graph. The data are smoothed using a six-month moving average to remove the extreme month-to-month volatility seen in this series. Regardless of any level of smoothing, though, housing starts remain well below any levels seen since the end of World War II.

Week Ahead. Given the underlying reality of a weaker economy and a more serious inflation problem than generally is expected by the financial markets, risks to reporting will tend towards higher-than-expected inflation and weaker-than-expected economic reporting in the months ahead. Such is true especially for economic reporting net of prior-period revisions. As discussed in Commentary No. 269, key series appear to have been distorted by seasonal factors warped by the extraordinary length and depth of the current downturn, one which is unprecedented in the period of modern economic reporting of the post World War II era. Particular issues are mentioned with individual series. 

New Orders for Durable Goods (December 2009). The December new orders for durable goods is due for release on Thursday, January 28th. The consensus estimate is for a 1.6% monthly gain in orders per Briefing.com, versus the 0.2% monthly gain reported for November. As has been the case for some time, however, whatever the reported month-to-month gain or loss, it likely will not be outside the usual month-to-month volatility of the series, which should continue to bottom-bounce at a low-level plateau of activity.

Gross Domestic Products (Advance Estimate of Fourth-Quarter 2009 GDP). Due for release on Friday, January 29th, possible GDP reporting is discussed above in the opening comments.