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Don't Be Surprised by Greater-Than-Expected 4Q GDP Growth

Forecasters have been forced to mark up their fourth-quarter estimates, and a growth rate as large as 4.7% remains possible.


JACKSON HOLE, Wyo. -- Fourth-quarter

gross domestic product

will be released on Jan. 29. The table below lays out a few GDP proxies.

The "Hours" column shows the change in the

index of aggregate hours

. Given that


could easily turn in an October-November-December increase as big 3.6%, this proxy introduces the possibility that fourth-quarter GDP will print with a six-handle (recall that hours plus productivity equals GDP).

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The "ICI" column shows the change in the

index of coincident indicators

. It predicts a slowdown between the third and fourth quarters similar to the one it predicted between the second and third. But it misled then, and it looks to do so again this time around.

The "NAPM" column shows the quarterly average of the

Purchasing Managers Index

. The NAPM claims that "the past relationship between the PMI and the overall economy indicates that the average PMI for January 1998 through December 1998, 50.2%, corresponds to a 2.3 % increase in GDP." But that is a bit silly; last year's growth rate will clock in right near 4%. And though the PMI has fallen materially and steadily for five straight quarters -- it now says the economy is expanding at a 0.5% rate! -- growth still isn't slowing. One more time: More than a year and a half after international crises first began pounding the American economy, they haven't sent it to the canvas even once.

Market guesses at fourth-quarter growth centered around 2.0% when the quarter began. Forecasters have since been forced to mark up their estimates, which now center around 3.5%.

But an actual increase even bigger than that -- something in the neighborhood of 4.7%, and possibly higher -- ought not surprise.