GDP Report Clips Doves

In the calm before the storm Tuesday , the markets were sanguine ahead of the year's first Fed Open Market Committee meeting and a deluge of data. As the data streams in Wednesday morning, traders are letting their nerves show.

For good reason -- economic growth accelerated at faster-than-expected 3.5% pace in the fourth quarter of 2006 and that's with a growing drag from the residential housing market. Housing activity fell 19.2%, topping the third quarter's 18.8% decline. The consensus had expected growth at 3% in the fourth quarter. The data brings the pace of growth for all of 2006 to 3.4%, greater than the 3.2% growth in 2005.

"What slowdown?" quips Michael Darda, chief economist at MKM Partners.

Major averages struggled Wednesday morning on the news as faster growth gets investors inflation and rate hike fears up and running. The S&P 500 and the Nasdaq Composite are in the red, but the Dow Jones Industrial Average is up marginally in recent trading thanks to strength in Boeing BA following its stellar earnings report.

Breaking down the figures, consumer spending increased 4.4% in the fourth quarter, up from 2.8% in the third. Government spending also increased 3.7%, and defense spending added 12%. Housing's 19.2% fall was the largest since 1991, and it is down for five straight quarters. Indeed, housing dragged GDP down 1.2% in the fourth quarter. Investment in equipment and software was also weak, and the unsung hero was trade. Exports jumped 10% in the quarter compared with 6.8% in the third. Imports decreased 3.2% in the fourth quarter.