Last week’s smaller-than-expected 3.8% drop in real gross domestic product in the fourth quarter was hardly good news for economic growth in the first half of 2009. The reason is the split between very weak demand and an unexpected rise in business inventories. The upswing in inventories contributed 1.3 percentage points to economic growth, while economists had anticipated a subtraction.
The problem is that overall spending last quarter dropped at a 5.1% annual rate, led by declines of 3.5% in consumer spending and 19.1% in capital spending by businesses. That’s 80% of U.S. demand right there. That sudden dropoff in demand, in addition to a huge 19.8% plunge in exports, caught businesses by surprise. Companies had been trimming their inventories for four consecutive quarters, but last quarter they couldn't cut fast enough to prevent an unwanted buildup, and ratio of inventories to sales has spiked sharply higher across all business sectors. That portends a steep liquidation in the first quarter, which will likely extend into the second quarter.
The resulting cutbacks in output and employment will weigh heavily on GDP growth, especially in the first quarter. Economists are now shifting their views of the pattern of GDP declines this year, and most now expect the first quarter contraction to be even sharper than last quarter.
This week’s data will help to determine just how weak current-quarter growth will be. The Bureau of Economic Analysis, which assembles the GDP numbers, did not have December data on business inventories and foreign trade when it issued its initial estimate of fourth-quarter GDP. The week offers reports on both, which could result in a significant revision to last quarter’s top-line number. Plus, the impact of those two reports on the mix of fourth-quarter GDP could have implications for growth this quarter. In addition, the government will issue data on January retail sales, which will offer guidance on how much drag consumers are exerting on overall demand this quarter.
Also of key market interest this week, two top Federal Reserve officials will be speaking on Tuesday. Bill Dudley, in his first public appearance since taking over as President of the New York Fed from current Treasury Secretary Tim Geithner, will speak on Treasury Inflation Protected Securities (TIPS) at a conference in New York. His remarks will most likely include the subject of inflation. In addition, Fed Chairman Ben Bernanke will be testifying before Congress on the Federal Reserve’s program to stem the financial crisis.
Here’s the weekly economic calendar, from Action Economics:
|Reports||Date||Time||For||Median Estimate||Last Period|
|Wholesale Trade Sales||Tuesday, Feb. 10||10:00 a.m.||December||-3.0%||-7.1%|
|Trade Balance ($Billions)||Wednesday, Feb. 11||8:30 a.m.||December||-$35.0||-$40.4|
|Goods & Services Exports ($Billions)||Wednesday, Feb. 11||8:30 a.m.||December||$138.8||$142.8|
|Goods & Services Imports ($Billions)||Wednesday, Feb. 11||8:30 a.m.||December||$172.5||$183.2|
|Treasury Budget ($Billions)||Wednesday, Feb. 11||2:00 p.m.||January||-$96.0||-$81.4|
|Retail Sales||Thursday, Feb. 12||8:30 a.m.||January||-1.0%||-2.7%|
|Retail Sales (Excluding Autos)||Thursday, Feb. 12||8:30 a.m.||January||-1.2%||-3.1%|
|Business Inventories||Thursday, Feb. 12||10:00 a.m.||December||-0.6%||-0.7%|
|Consumer Sentiment Index (preliminary)||Friday, Feb. 13||9:55 a.m.||February||60.8||61.2|
|SPEECH: Dallas Fed President Fisher||Monday, Feb. 9||8:45 p.m.|
|NFIB Small Business Survey||Tuesday, Feb. 10||7:30 a.m.||January|
|ICSC-UBS Store Sales||Tuesday, Feb. 10||7:45 a.m.||Feb. 1-7|
|Johnson Redbook Weekly Store Sales||Tuesday, Feb. 10||8:55 a.m.||Feb. 1-7|
|SPEECH: New York Fed President Dudley||Tuesday, Feb. 10||9:00 a.m.|
|TESTIMONY: Fed Chairman Bernanke||Tuesday, Feb. 10||10:00 a.m.|
|Mortgage Applications||Wednesday, Feb. 11||7:00 a.m.||Feb. 1-7|
|SPEECH: Chicago Fed President Evans||Wednesday, Feb. 11||1:00 p.m.|
|Initial Unemployment Claims||Thursday, Feb. 12||8:30 a.m.||Feb. 1-7|