By Chris Cermak
WASHINGTON (MNI) – The outlook for the U.S. economy in 2012 is
looking a little bleaker after the release of Friday’s fourth-quarter
GDP report, which showed growth was propped up in large part by
temporary factors that are unlikely to carry through into this year.
While the Federal Reserve and others stressed short-term factors
were constraining growth in early 2011, economists now are cautioning
the opposite: temporary adjustments pushed Q4 GDP above its likely trend
for the first half of 2012 and beyond.
“The economy grew solidly in the fourth quarter, however we think
the details of the report were weaker than the headline print,” Yelena
Shulyatyeva, U.S. economist for BNP Paribas, told MNI. “The contribution
from inventories is always a huge swing factor (and) we should see more
of a decline in auto sales going into the first quarter of this year.”
Ahead of the Commerce Department report Friday, economist already
cautioned that the high rate was unlikely to be sustained moving into
2012. The actual results for Q4 GDP dented those expectations even
further, coming in at 2.8%, below the median forecast of 3.0% in a
Market News International survey.
The key worrying signs came from an even heavier-than-expected
build in private inventories, together with unusually strong auto sales,
which were propped up by the sector’s recovery from the Japanese
earthquake and flooding in Thailand that disrupted supplies early last
year.
Shulyatyeva said auto sales have already shown signs of moderating
again in January. On the positive side, she said weaker consumer goods
spending in future should be offset by higher spending on services,
which surprised on the downside in Q4 with a meager 0.2% growth rate,
largely due to unseasonably warm weather that pulled down utility bills.
Consumer spending was also held up by unexpected gains in
employment, as well as through a decline in the household savings rate,
both likely are temporary trends that could depress spending in 2012.
Sam Bullard, senior economist with Wells Fargo, told MNI, “The
trend is still there that (consumers) are funding current spending by
drawing down savings.”
He said consumers are “not going to be able to continue to fund at
the same pace … we really need some employment growth.”
Some other troubling signs for 2012 come from government spending,
a major weakness throughout 2011 that is likely to prove a continuing
drag this year. The government cut-back was larger than expected in Q4,
down 4.6% and led by defense cuts. Fixed investment (up 3.3%) also
pulled back from higher growth rates earlier in the year.
Bullard said he expects the weaker business investment numbers and
swings in private inventories could continue well into 2012 amid
continued uncertainty about the economic outlook and debt crisis in
Europe.
“We sort of have this swinging phase … where (businesses) will
pull back so much that they can’t keep up with current demand,” Bullard
said. “That’s going to probably continue, given that Europe is probably
going to flare up again,” as Greece nears a major deadline for paying
back bondholders in March.
Residential investment, up a surprising 10.9% in Q4, also likely
trended on the upside as warm weather disrupted seasonal factors, while
the introduction of new fees on Fannie Mae and Freddie Mac mortgages in
April could also have pushed year-end housing numbers higher, according
to Shulyatyeva.
The weaker underlying growth numbers, coupled with a much lower
than expected increase in the GDP price index (up 0.4%), should keep
markets on watch for a possible third round of quantitative easing from
the Federal Reserve some time in 2012.
Even New York Federal Reserve President Bill Dudley played down the
headline GDP number Friday, saying in a speech “this boost is likely due
in part to temporary factors,” while suggesting the low price index was
“more indicative” of inflation going forward than the higher Q3 rate.
“The amount of slack in the economy remains substantial. Moreover,
I think it is unlikely that the pace of growth we saw in the fourth
quarter will carry through to the first half of 2012,” Dudley said.
The Fed Wednesday lowered its 2012 GDP forecast to a central
tendency of 2.2% to 2.5%. The International Monetary Fund a day earlier
left its U.S. forecast unchanged at a more pessimistic growth rate of
1.8% for this year.
Shulyatyeva said she expects 2012 will be “not quite as jumpy” as
2011, which saw quarterly growth range from 0.4% in Q1 to 2.8% in Q4.
BNP Paribas predicts growth of 1.0-1.5% in the first half and
2.0-2.25% in the second half of the year.
–Chris Cermak is a Washington reporter with Need to Know News
** Market News International Washington Bureau: 202-371-2121 **
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