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Fourth-Quarter GDP Gets Revised Higher

The upward revision in fourth-quarter gross domestic product growth to 1.4% from the 0.7% gain previously reported was a bit higher than the consensus forecast. There were a couple of component surprises that partly explain why many economists were caught off-guard with the revision, and had estimates that were too low.

The biggest revision in the report was a $21.4 billion upward revision in business inventories, which was almost exactly in line with most estimates, and which switched the inventory contribution to fourth-quarter GDP growth from a $15.5 billion subtraction to a $5.9 billion addition.

Also, small expected upward revisions were seen in the residential construction and equipment spending components, and in nondurable consumption.

Net exports, however, was much weaker than we at MMS International expected, with a $20.7 billion downward adjustment to a relatively large $39.6 billion fourth-quarter subtraction, and it was this downside risk that many market economists focused on.

There was an upside surprise in service consumption that almost exactly offset our forecast error for net exports. This surprise took the "edge" off the fourth-quarter slowdown in consumption, which now is reported to have grown 1.5% instead of 1.0%, with an expected 1.2% fourth-quarter final sales growth rate.

Michigan Sentiment Rises

The final February reading for the University of Michigan's Consumer Sentiment rose to 79.9 from a preliminary level of 79.2, but still marks a decline from the January reading of 82.4.

Nonetheless, sentiment held up better than expected given that heightened geopolitical tensions, surging energy prices, weakness in stock prices, and lingering questions regarding the economy all suggested downside risk from the preliminary figure. In addition, the Michigan survey also continues to show some optimism related to the Conference Board measure, where the index plummeted to 64.0 from 78.8.

As for the components, the current conditions series climbed to 95.4 from a preliminary level of 95.3 and a January reading of 97.2. The expectations component rose to 69.9 from a preliminary reading of 68.8 and January's 72.8.

While today's figure still leaves consumer sentiment hovering at one of the worst levels of the last decade, which raises the downside risk for consumption as we enter 2003, we at MMS think that the recent deterioration has more to do with feelings than outright economic fundamentals. As such, we see consumption holding-up better than the depressed levels of confidence would usually suggest.

Chicago-PMI Slips

The February Chicago-PMI moderated to 54.9 from 56.0. The index held up better than expected on the month, as it showed strength relative to the big declines seen in both the Philadelphia Fed survey, which dropped to 2.3 from 11.2, and the New York Fed, which fell to 1.13 from 20.72.

The survey also appeared to shake-off any drag related to a decline in auto production on the month and inclement weather.

As for the components, new orders was encouraging with an increase to 59.0 from 58.0, while production dipped, but remained at a still-impressive 62.4 from 63.1. Even employment rose, though it still remains below the 50 boom/bust threshold, rising to 46.6 from 45.6. On the price front, prices paid increased to 54.9 from 54.2, although this was well below the risk given the sharp jump in energy prices on the month.

Overall, while the report suggests some downside risk to Monday's ISM (national manufacturing survey), the strength in today's report suggests any downside risk is likely limited. We will keep our forecast at 52.5 from January's 53.9. The report also suggests that the manufacturing sector appears to be maintaining a firmer tone in 2003 following the lull seen in the second half of last year, which is all the more encouraging given all the geopolitical risk. From MMS International

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