What the GDP Report Says About 2012

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Marc Chandler and Mark McCormick

NEW YORK (BBH FX Strategy) - U.S. fourth-quarter GDP disappointed in the headline at 2.8% (against the consensus of 3%), but the real disappointment is in the details.

The key there is inventories, where the preliminary figures showed rose $56 billion at an annual pace, adding 1.9 percentage points to GDP. This buildup may weigh on first-quarter 2012 GDP as inventories are unwound. At the same time, real consumption growth firmed less than expected to 2.0% in Q4 from 1.7% in Q3, as service demand was nearly flat. Overall, the meat of the reports is slightly negative for the outlook for Q1 2012.

Fixed investment grew at a pace much slower than expected. Equipment and software spending rose 5.2% vs 16.2% in Q3. This slowdown is likely to continue as the end of the tax break is felt.

Another disappointing detail was the plunge in inflation. The GDP deflator rose 0.4% after a 2.6% rise in Q3. The core PCE deflator rose 1.1% (higher than the consensus forecast of 0.9%) but down from 2.1% in Q3. This is important, especially in light of the Fed's focus on achieving the dual mandate of price stability and full employment. This is not deflation, of course, but if it persists, the risk of QE3 increases.

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Residential investment jumped 10.9% after a 1.3% gain in Q3. This is not home building, but home improvement. How did households pay for this? Draw down savings. Savings fell to 3.7% from 3.9% and is the lowest since Q4 2007. This will also be important to watch for signals related to personal consumption. In particular, in the months ahead, personal income growth will be necessary to support personal consumption if this trend in savings persists -- all else equal.

The government sector remains a net drag on GDP. This may be surprising for some who amid the election cycle have been bombarded with reports of the expansionary nature of the government. Rather, what is happening is that the federal government expenditures are not offsetting the retrenchment by local and statement government. Overall, the government cut spending at a 4.6% annual rate, the fifth consecutive quarterly decline. For the entire year, government spending dropped 2.1%, the most since 1971.