GDP Upward Revision Marred by Unfavorable Data

Is it possible that the negative flow of economic readings in late 2015 and the start of 2016 are not as bad as most economists and investors were led to believe? That may sound conspiratorial in nature, but take a look at the first revision to the gross domestic product (GDP) for the fourth quarter of 2015. GDP was revised higher, with the gain rising to a 1.0% growth reading rather than the 0.7% gain that was projected in the preliminary reading a month ago.

What makes this thought more legitimate is that both Bloomberg and Dow Jones were calling for that 0.7% reading to be revised lower to a gain of 0.4% in fourth-quarter GDP.

Where things look less affected on the whole is on the GDP price index. This was revised to a gain of 0.9%, versus the 0.8% preliminary figure of a month ago. The consensus estimate was for the price index to have remained static at 0.8%.

What drove the figure higher was an upward revision on inventory growth. This hardly seems comforting, and it also lowers the thought of a conspiratorial view here. That was revised to +1.0% versus the prior 0.3% gain. What this translates to in real dollars was a move up in inventories to $81.7 billion from the preliminary reading of $68.6 billion.
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Again, this uptick in GDP feels mostly like an inventory driven report, and it is very likely that this may be an unwanted inventory buildup. It may even act as inventory that is going to eat into the first-quarter figure of GDP. If businesses have unwanted inventories, their demand for new replacement inventory is going to be lower.

To support the inventory impact, there was a disappointment in the personal consumption expenditures portion of the GDP report. That was revised to 2.0% growth, versus the preliminary 2.2% report a month earlier.

Non-residential investment was weak due to weak energy and mining spending (-1.9%). Exports remain weak due to a strong dollar and due to weak international demand (-2.7%). Final sales rose 1.2% and residential investment remained high at 8.0%.

This poster-child report is a classic example of a good-news meets bad-news economic report. The number looks better on the surface, but peeling the data back just one layer shows more concern than optimism.