The minority camp that expects a deep weakening of the U.S. economy may get a few new members today following the weak GDP report for the fourth quarter. That said, for a variety of reasons, including some related to the details of today's report, few minds will be changed. At most, some will become a little more open to the possibility of a deeper slowdown than expected, but in the absence of factors that reinforce the thesis, they will stick with their current views and maintain their positions.
A key aspect of the GDP report that might lure some market participants into the bear camp was the weak pace of business spending. The 3.5% gain posted in spending on equipment and software was far below the double-digit gains seen over the past two years, a pace that was expected to have been repeated in the fourth quarter. Many are banking on a strong pace of business spending to offset expected weakening in consumer spending in 2006.
The 1.1% GDP gain was considerably weaker than the consensus expectation of 2.8%. There are a few reasons for the miss. For starters, government spending, including spending by federal, state and local government, was much weaker than expected. It fell at a 2.4% annual pace, shaving a half-point from the headline gain. Expectations were for government spending to add as much as a half-point, so there was a swing factor of a percentage point due to the unexpected decline in government spending, which was led by a 7% decline in federal spending. This decline is unlikely to last.
Tony Crescenzi Blog Expectations on GDP 1/27/2006 8:18 AM EST Here are the keys for the pending report.
Tony Crescenzi Blog Japan Likely to Open Solid 1/26/2006 3:47 PM EST Nikkei futures are trading at 16,175, well above the overnight close.
Tony Crescenzi Blog Options Activity Shows Bearishness 1/26/2006 11:32 AM EST Treasury options underscore the recent action in the market.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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