What’s The Story?

by CC January 27, 2012 9:24 am • Commentary


Stock futures have pulled back in response to the advanced reading on fourth quarter GDP. Data showed economic growth of 2.8%, which is less than the 3.2% clip that had been widely expected to follow the 1.8% increase that was posted for the prior quarter. The Chain Deflator for the quarter showed an increase of 0.4% in the face of calls for an increase of 1.5% after it had jumped 2.6% in the prior quarter.


Dan Greenhaus, chief global strategist at BTIG, flags the key numbers:

Consumer spending growth, which accounts for roughly 70% of GDP, continues to be restrained by spending on services.  Services spending is roughly 65% of all consumer spending and if it is not growing robustly (it rose by just 0.2% in Q4), then overall consumer spending cannot grow robustly and by extension, GDP cannot grow robustly.

Inventories rose by $56 billion in Q4, the largest build since Q3 2010.  This contributed 1.94 ppts to growth (70% of the headline rate of growth) which is why real final sales, which exclude the impact of inventories, rose by just 0.8% in the quarter.

As we enter 2012, the U.S. has a minor head of steam however we, like many, expect a drop off in growth rates to start the year.  The composition of growth in Q4 isn’t exactly what one would have hoped for, given the build in inventories.  But we have been talking for several years now about a slower growth, lower return environment.  Today’s data only reinforces that position and that belief.

Steven Ricchiuto at Mizuho Securities digs deeper into the inventory build and doesn’t like what he finds:

The problem with the inventory build is that it is large auto related and the current build rate appears out of line with demand. Even the upward trend in corporate investment spending appears to be losing momentum despite strong corporate balance sheet and excess cash holdings.

Jim Baird, chief investment strategist at Plante Moran, sees the engine of the economy running on fumes:

Broadly, our enthusiasm remains tempered by the fact that the modest pickup in spending was largely funded through a reduction in the savings rate.  Such an adjustment can satiate consumers’ spending desires for some time, but cannot be sustained.  With holiday cheer no longer stimulating households to spend more, will consumers step back in the quarters ahead?  That remains a question and a risk.

Jennifer Lee at BMO Capital thinks this report makes the Fed look smart:

after the big run-up in inventories, look for stockpiles to subtract from growth in the first three months of the year. Government spending? Nope. That leaves consumer spending (which has been improving but not at lightning speed), housing (a small part of the economy these days), and possibly trade. The Fed’s decision this week looks warranted.

Alan Ruskin of Deutsche Bank, looking on the bright side, thinks this report is just good enough to fit the “Goldilocks” scenario of recession avoidance coupled with an easy Fed until the sun goes supernova:

If most participants went into the number thinking about underlying growth in the 2% – 3% range into 2012, they probably will come out with a view that it is more likely nearer the bottom end of this range.   The data tends to work with the very dovish stance portrayed by the FOMC earlier this week, especially since gross domestic purchases prices was subdued at 0.8% as was core PCE deflator at 1.1%   Growth is clearly vulnerable to either a EUR area, or oil shock, but barring either of these, growth is still in the range that will keep global risk appetite modestly bid.   In that context I suspect the setback to risk trades will be subdued.


In Asia, stocks closed mixed, with the Nikkei 225 down 0.09% at 8841.22 and the  Hang Seng up 0.31% at 20501.67.

Stocks to Watch

Among the companies whose shares are expected to actively trade in Friday’s session are Starbucks Corp. (SBUX), Riverbed Technology Inc. (RVBD) and Juniper Networks Inc. (JNPR).

Starbucks’s fiscal first-quarter earnings rose 10% to a record high on solid comparable sales gains in its Americas stronghold, as well as robust growth in its smaller Asian operations and the burgeoning consumer products segment. Shares in the coffee giant were down 2.1% at $47.31 after hours as the company’s guidance boost was more conservative than expected.

Riverbed’s fourth-quarter earnings rose 60% as revenue jumped across each of its regions, though margins slipped. Shares declined 14% to $25.80 in recent after-hours trading.

Juniper Networks Inc.’s (JNPR) fourth-quarter profit fell 49% as the network-gear maker’s router sales continued to weaken. Shares dropped 8.1% to $20.56 in recent after hours trading as the company forecast a grim first-quarter adjusted profit that missed analysts’ expectations.


Overnight Headlines (Links)

U.S. & World

Gingrich Leading as Fight Intensifies

Egypt Blocks American Workers’ Exit

Iran Blasts West Over Oil Embargo

Nuclear Reactors in Japan Examined


Twitter Can Censor by Country

Storm Clouds Loom on P&G’s Horizon

Auto Makers’ New Math Drives Net

Samsung’s Chips Gain, but Smartphones Feel Pressure


EU Red-Flags ‘Volcker’

ECB Loans Pose Dilemma for Banks

European Stocks Slip

Investors Abandoning Copper, Cotton, Crude