This morning's report on fourth quarter GDP was a little disappointing, showing economic growth of 2.8%, which was below expectations. Growth in personal consumption, the largest portion of the economy, grew at a 2% annual rate, which was in line with recent trends and didn't reflect the burst that some were expecting. Spending on motor vehicles did surge, but spending on services was relatively flat. Federal spending subtracted from GDP, led by a significant decline in defense spending (mainly reflecting the timing of purchases). On a cautionary note for future economic growth, inventories were responsible for just under 2% of economic growth; thus final sales to domestic producers rose by only 0.9%. In other words, when one removes the effect of a build-up of inventories, economic growth was under 1%. The build-up in inventories suggests that future production will be constrained.
After rising to above 6% during the recession, the savings rate has declined to 3.7%, the lowest since 2007. One reason is that real disposable income per capita was flat for the quarter and down for the year. This raises concerns about consumer spending as we move into 2012. On a more positive note, inflation as measured by the PCE deflator rose only 0.7%, the lowest since Spring 2010, reflecting a slowdown in inflation.
Overall, a weaker than expected report that continues to confirm a modest economic recovery without evidence of speeding up any time soon.