While fourth quarter GDP growth was a bit weaker than expected, a trend that will probably extend into first quarter data, we think the groundwork is in place for a gradual  acceleration of the U.S. and global economies in 2012, with the possibility of a V shaped burst in the second or third quarter. 

An acceleration makes sense after the battering in 2011 from Japan’s earthquake; the unsettling U.S. debt limit fiasco and downgrade in August; the ECB’s delay in providing banks with unlimited access to a lender-of-last-resort facility; and China’s engineered slowdown from its real estate bubble -- China controls the ups and downs through credit policy and will want strong growth in 2012 during its leadership change. 



  • U.S. fourth quarter GDP came in at 2.8%, up from 1.8% in the third quarter.  It was weaker than our 3.5% October forecast and this morning’s 3% Bloomberg consensus (data is quarter over quarter annual rate adjusted for inflation and seasonality.) 


  • Fourth quarter GDP growth was helped by a buildup in inventories, which provided 1.9% of the 2.8% growth.  The inventory buildup adds to output in the quarter but will probably subtract from future quarters unless demand accelerates. 


Notable on the weak side in this first estimate of fourth quarter GDP:


  • Personal consumption was weak in December (nominal retail sales were previously reported to have grown only 0.1% in December from November).  The month-by-month breakdown of fourth quarter consumption will come out on Monday.  Based on the existing October and November data, December real consumption must have fallen 0.1% versus this morning’s consensus of 0.1% growth. 

  • Government consumption of goods and services subtracted 0.9% from GDP. 

  • Some of the fourth quarter undershoot came from utilities.  Due to warm weather, inflation-adjusted consumption of household services (which are heavily effected by utility usage) subtracted 0.4% from consumption (versus a 0.4% add in the third quarter), holding consumption growth down to 1.5% in the fourth quarter.  The industrial production data had shown a 2.7% decline in December output from electric and gas utilities from November, explaining the likely December weakening in the overall economy. 

We expect the slowing trend evident in December to extend into the first quarter of 2012, and are maintaining our 1.5%-2% Q1 forecast.  As 2012 progresses, however, we expect a reacceleration of the U.S. economy based on:


  • Pent-up investment demand, with durable goods order up a strong 3% in December and likely to translate into production gains in the first quarter;

  • A pickup in Asia as China and others loosen monetary and credit policies and production shifts to meet domestic demand. 

  • And continued growth in corporate profits.  Broad corporate profits (from the GDP data) have been one of the best leading indicators of GDP growth, falling well before GDP and rising during expansions.  We won’t get fourth quarter profits from the GDP data for another month, but they are expected to have continued to grow, adding to the other types of income included in fourth quarter GDP and providing a platform for future GDP growth.