Taking Apart the Tainted GDP Data

For more commentary from Tony Crescenzi and his instant reactions to the latest economic news, check out his blog on RealMoney.com.

According to the latest gross domestic product data, the U.S. economy expanded faster than expected in the fourth quarter, at a 3.5% pace compared to the forecasts for 3.0%. This gain followed subpar growth in the previous two quarters.

These fourth-quarter data are strong enough to keep the Federal Reserve on the sidelines. Although growth did accelerate, those who are bearish on the economy will seize upon some important factors in the GDP report:

• A decrease in business spending
• Sharp weakness in residential investment
• High government spending
• Lackluster nominal personal spending.

If the fourth-quarter GDP gain had been purer -- in other words, if it had occurred in the absence of the aforementioned factors -- speculation about the possibility of a renewed bout of rate hikes would surely have developed after the release of the report.

I don't mean to discredit the fourth-quarter gain completely, and I have been upbeat about growth, but the reported gain must be watered down to some degree. Let's take a look at each of the four factors listed above and how we can interpret the data.

Business Spending

First, business spending fell during the quarter, with spending on equipment and software falling at a 1.8% clip. That's the second decline in three quarters and the largest since the fourth quarter of 2002.

The weakness is likely a response to the anemic GDP reports of the past two quarters, and businesses were probably concerned about growth prospects in light of the sagging housing sector and high energy costs that existed at that time. Business spending will probably pick up in the first quarter in response to the decline in energy costs and signs of bottoming in home sales.