Preliminary Estimate: GDP at 0.6% for 4Q07
This is shaping up to have been a weak quarter.
This sentence from BEA’s report sticks out:
The real change in private inventories subtracted 0.98 percentage point from the first-quarter change in real GDP, after subtracting 1.16 percentage points from the fourth-quarter change.
That’s a lot. If inventories had stayed the same, 4th quarter 2006 growth would have been about 3.7%, and 1st quarter 2007 would have been about 1.6%.
That means that businesses reduced inventories for the second quarter in a row. The two-quarter reduction is a combined $29 billion (about 2.14% of a $13.5 trillion GDP, the sum of 0.98% and 1.16%), which I’m guessing most observers didn’t think could happen. Its possible, but doesn’t seem likely, that businesses have suddenly figured out a way to run even leaner and meaner and stay that way permanently. But I would think that any kind of increase in consumer or business demand, which may have already occurred since the end of the first quarter, will cause a bounce-back effect, leading to an inventory build-up that might make GDP jump sharply in future quarters.
Tomorrow’s employment and ISM manufacturing reports, and next week’s ISM non-manufacturing report, will be very important indicators of whether that bounce-back might be occurring.
