SCOREBOARD: Growth clipped

That US GDP fell 0.1 per cent in the fourth quarter is going to alarm some I realise. I haven't checked the full span of commentary but it won't surprise me one iota to see the double-dip call. I've learned to live with it. Now it's not a great number and I'm not going to pretend it is, but as always we need to try and determine whether this number really does reflect momentum. Or a change in it.

The answer for mine is no. For a start, inventories knocked a full 1.3 percentage points off growth. Net exports took off another 0.3 per cent and then government shed 1.3 percentage points. Consumer spending – 70 per cent of the economy roughly – actually accelerated in the quarter rising 2.2 per cent. Similarly business investment was stronger. This is what matters – private demand. Inventories likely fell because firms didn't anticipate the strength of private demand and so ran down stocks. Net exports bounce around and while there is trend decline in government spending (as there should be), it's not normally this large, indeed a fall in defence spending accounted for nearly all of it and I suspect that fall was due to the fiscal cliff.

The broader picture shows that in 2012, GDP grew by 2.2 per cent, which is up from 1.8 per cent in 2011. If you want to measure GDP like we do in Australia, GDP was flat in the fourth quarter and rose 3.3 per cent year-on-year. Consumer spending was up 3.6 per cent year-on-year, which is good growth. Bottom line is, the US economy is still travelling well.

That said the headline result wasn't exactly inspiring and stocks weakened as a result, but falls weren't of magnitude that suggest panic. With about an hour to go, the S&P500 is off 0.2 per cent (1505), the Dow is 23 points lower (13934), while the Nasdaq is flat to negative (3152).

The FOMC decision had only a modest uplifting impact. Overall there wasn't any change in the message that the Fed is trying to give the market but its odds on further money printing action. This is indicated by the FOMC comments that "if the outlook for the labour market does not improve substantially, the committee will continue its purchases of Treasury and agency mortgage-backed securities (currently $85 billion per month), and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.”

Given the Fed doesn't expect a ‘substantial improvement' its odds on for more action, although that's not to say we haven't already seen a substantial improvement. We have, but the Fed needs to justify why it is monetises debt and debases the dollar. We actually saw a labour indicator last night and it suggests the strong pace of growth we saw in 2012 will continue into 2013. Specifically, the ADP employment report showed 192,000 jobs were created in January (which was higher than expectations for 165,000 and follows 185,000 jobs in the month prior). Don't forget payrolls are out this Friday. Otherwise the FOMC said that growth had paused in recent months, but noted that this was due to weather and other transitory effects.

In price action elsewhere, commodities had a better session if it and crude rose a further 0.4 per cent ($97.96), copper was up 1.5 per cent and gold almost $15 to $1675. There was very little action on the rates space – the US 10-year yield traded within a 5 bps range and sits just under 2 per cent. The 5-year is at 0.88 per cent, while the 2-year is at 0.27 per cent. Finally, in the forex space, the Australian dollar was down about 60 pips and sits at $US1.0404. The euro was up about 90 pips (1.3565) while sterling was up 50 pips and the yen was up to 91.18 from 90.92.

Bits and pieces otherwise, the eurozone business climate indicator was steady in January at -1.09 (January) from -1.11, with economic confidence improving to 89.2 from 87.8. On the downside, GDP in Spain fell 0.7 per cent in the fourth quarter after a 0.3 per cent fall in the third quarter. Finally, UK mortgage approvals rose 3.3 per cent in December to 55.8k.

Looking at the day ahead, the SPI suggests the All Ords will be flat today while the macro data flow is light. The key release will be the Reserve Bank's private sector credit numbers at 1130 AEDT, although we get trade prices as well from the ABS. For data abroad, Japanese industrial production this morning is worth keeping an eye on (1050 AEDT), while tonight we get German retail sales, employment and inflation, while for the US we saw jobless claims and personal income and spending.

Have a great day…

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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