Preliminary 4th Qtr Real GDP Decelerated More than Expected to +.6% Annualized Growth

Real GDP growth, excluding inflation, slowed sharply in the fourth quarter of 2007 to +.6% annualized from the strong 4.9% annualized pace of the 3rd qtr. Consensus had been looking for +1.2% annualized growth. The huge drop in residential construction (-24% quarterly annualized) took 1.2% off of the 4th qtr growth rate, and was the largest quarterly decline since 1981, as the pace of decline accelerated its 8th straight quarterly decline. Inventories suffered their largest decline in almost 6 years in the 4th qtr. Reduced inventories subtracted -1.25% from GDP growth. A drop in inventories is healthy for the economy long term, but a drag on GDP for the 4th qtr. Auto production remained a drag in the fourth quarter as production fell -27% annualized, which was primarily responsible for the reduced stockpiles of inventory. Auto inventory declines subtracted -.9% from the quarter's GDP growth. Excluding autos, the economy grew +1.6% annualized. Real final sales (GDP less inventories) rose a better than expected +1.9%. Consumer spending, which accounts for over 70% of total consumption, fell to 2% in the fourth quarter, while helping GDP growth by +1.4%. Real disposable income rose only +.3% annualized in the third quarter versus an increase of +4.5% in the third quarter. Savings from current income are near zero, to slightly negative. Government growth was OK at +2.6% annualized, and capital expenditure was decent at +7.5%. A bright spot remains export growth, which grew +3.9% annualized in the 4th qtr after rising +19% in the 3rd qtr.. The shrinking trade deficit added the most to GDP growth last year since 1991 (+.55% YoY). For all of 2007, the economy grew +2.2% YoY, which was the slowest pace in five years since the last recession. Real GDP grew at a 2.9% YoY pace in 2006. Spending grew at +2.9% YoY, the slowest pace in four years. Rising energy and food prices helped push up headline inflation to 2.6% from 1% the prior quarter. Core PCE inflation rose slightly more than expected to +2.7% annualized from +2% in the prior quarter, and was the highest since the 2nd qtr of 2006. The PCE deflator rose 3.4% in 2007, while the core PCE was up 2.1% YoY. Net, the economy slowed substantially in the fourth quarter, but the large reduction in inventories should allow the economy to recover more quickly than otherwise as large inventory overhangs should be less of an issue to work through this year. First quarter 2008 GDP estimates are likely to be revised higher following this report.