Jeff Kowalsky/Bloomberg

What to Look for in Friday's U.S. GDP Report

Though a downward revision is projected, the consumer is expected to hang in there

Friday we get a second look at U.S. gross domestic product for the fourth quarter. The Commerce Department report is slated to hit the wires at 8:30 a.m. and will incorporate data that wasn't available in the first release a month ago. Here's what to expect:

A downward revision in GDP...

The value of all goods and services produced in the U.S. rose at about a 2 percent annualized pace in the fourth quarter, a marked step down from the initial estimate of 2.6 percent, according to the median forecast of economists surveyed by Bloomberg. This would follow a 5 percent rate in the third quarter that was the strongest in 11 years.

While on the surface this looks bad, it was also probably caused by two of the most volatile components in GDP: trade and inventories. Household consumption, which is the biggest factor in growth, is forecast to hold at the previously reported 4.3 percent pace.

That rate of growth in consumer spending was the best since the first quarter of 2006,  and probably owed to strong job growth last year. If consumption hangs in there as economists project, that would mean a big tailwind going into 2015 is still intact.

"The domestic economy looked very strong in late 2014, and I think that momentum has continued into the first quarter," said Michelle Girard, chief U.S. economist at RBS Securities Inc. in New York. "Particularly in the consumer sector, things look good."

...thanks to the trade gap and inventories

While a stronger consumer was good for growth, there was a downside. The first estimate of GDP was issued before December's trade data were released and showed record imports. The trade gap in goods and services increased 17.1 percent to $46.6 billion, the biggest shortfall since November 2012, according to the Commerce Department . 

U.S. companies imported a record $48.8 billion of consumer goods along with more industrial supplies and capital equipment.  The more imports swamp U.S. shipments overseas, the bigger the drag on GDP.

Reducing the trade gap will probably be a difficult task in the near-term because weaker foreign markets mean less demand for U.S. goods, and because a stronger dollar has the double whammy of making American exports costlier and purchases from abroad cheaper.

Meanwhile, economists also expect that inventories added less to growth than previously estimated. While stockpiles increased more in the fourth quarter than the previous three months, the revised data will probably show that they just didn't increase as much as the government's initial tally. That puts the U.S. on better footing for the first quarter, Girard said. Here's how she explains it:

"The more inventories that are built up, potentially the less production you would need going forward unless there was a big step up in demand,'' Girard said. The downward revision in stockpiling ``would leave the economy in a little bit better position for growth and production in the first quarter than was suggested previously."

What you won't get

The Bureau of Economic Analysis, which crunches the numbers for GDP, customarily does not publish figures on corporate profits and gross domestic income in its second estimate of fourth-quarter growth, said Jeannine Aversa, chief of public affairs and outreach at the agency. Because companies are given more time to report financial statements at year-end, there usually isn't enough data for the agency to make a reliable estimate of corporate profits, which feeds into GDI.

That data will be contained in the government's third revision to fourth-quarter GDP, which is slated for March 27.

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