The Big Picture

... continues to be one of my favorite economic blogs.

This is an interesting piece on how economists are often "perplexed"

WSJ: "After the economy navigated a brutal hurricane season to post robust growth in the third quarter of 2005, growth cooled considerably in the fourth quarter. Gross domestic product, the broadest measure of U.S. economic output, increased at just a 1.1% seasonally adjusted annual rate as free-spending consumers became more cautious and the gaping trade deficit continued to provide a drag on the expansion. For all of 2005, GDP growth averaged a 3.5% annual rate. What does the slowdown in the fourth quarter mean for the economy in the months ahead?

Economists weigh in with their reactions:

"In both its overall appearance and underlying detail, the 1.1% fourth quarter growth in real GDP ranks as the most perplexing report in memory. At face value, such weakness would seem to make it more difficult for the Fed to tighten monetary policy again. But the underlying details reinforce -- if not increase -- perceptions that much faster growth lies ahead. Nonetheless, the confusing and conflicting contradictions with other data make it difficult to be confident in any inferences about the outlook."
-- David Resler and Gerald Zukowski, Nomura Securities International
* * *
"Consumer spending was actually a little better than expected, rising by 1.1% in the quarter vs. our forecast of +0.3%. I think more of the decline in auto sales was apportioned to the business sector (fleet sales) and less to the retail side than we expected. Housing posted a reasonable gain of 3.5%, but this was less than half of our assumed rise. The monthly source data pointed to a bigger gain, so this is a bit puzzling."
-- Stephen Stanley, RBS Greenwich Capital
* * *
"The consensus was a bit optimistic but this is a big surprise. The softness against our 2.6% forecast is explained by two components, fixed investment and government consumption. The former rose only 3.0%, with equipment and software up only 3.5%. This is baffling, given the 19.5% annualized leap in the value of capital goods production and the 14.9% rise in shipments of core nondefense capital goods. We expect big upward revisions."
-- Ian Shepherdson, High Frequency Economics
* * *
"While this was a disappointing report, there are signs of a very sharp rebound in GDP growth in the current quarter. First, much of the miss in fourth-quarter inventories is likely to spill over to the first quarter. Second, at least a partial rebound in defense appears likely. Finally, the ramp for consumption spending is even more favorable in the aftermath of the fourth quarter data. The bottom line is that we now see a very good possibility of 5%+ GDP growth in Q1 -- versus our prior estimate of +4.2%."
-- David Greenlaw and Ted Wieseman, Morgan Stanley