–Core PCE Prices +0.4%, Smallest Since Series Began in 1959

By Joseph Plocek

WASHINGTON (MNI) – The expected economic momentum in Q4 translated
into a mere +3.2% real GDP growth rate, but underlying trends of growing
consumption and slower imports suggest the print contains more strength
than on the surface.

Q4 real final sales posted +7.1% in its best showing since Q2:1984
as consumption and residential spending surged and imports fell.
Spending on goods gained 10.1% and was boosted by +21.6% for durables as
spending surged on autos and recreational vehicles and goods.

Meanwhile, nondurable goods spending jumped 5.0% as food and
clothing sales gained, and services spending was up 1.7% in a
continuation of trend.

So the underlying economic trend is strong, and growth is stronger
than on its face. The real final sales gain is more akin to what one
would see out of the gate after a recession ended. In this case the
surge was delayed but momentum was building over the year.

The level of chained Q4 GDP was a record $13.383 trillion, finally
surpassing the pre-recession level in Q4:2007 by about $20 billion. For
all 2010, real GDP increased 2.9% after falling 2.6% in 2009.

Government spending and inventories remain weak spots.

Federal spending fell 0.2% on the back of a drop in defense
spending. State and local spending fell 0.9%. Both sectors should remain
under pressure ahead as tax cuts collide with spending reductions. The
stimulus act cut taxes and added social benefits in Q4 but will be
reduced ahead.

Inventories cut 3.7 points from growth after adding for five
consecutive periods. This may be the other face of lower imports.

The Commerce Department assumed rising inventories and a wider
trade gap for missing data.

Core PCE prices printed +0.4% in their smallest gain since the
series began in 1959. Overall GDP prices printed +0.3% and gross
domestic purchases prices printed +2.1%.

Looking ahead, Q1 GDP should remain strong. Official sales data
have not yet been reported for January, but weekly reports and anecdotal
information suggest gains. And snowstorm-induced delays in spending
generally lead to rebounds in later weeks, as should the Social
Security tax cut.

GDP Components: Q1 Q2 Q3 Q4 prelim
Real growth +3.7% +1.7% +2.6% +3.2%
Real final sales +1.1 +0.9 +0.9 +7.1
PCE +1.9 +2.2 +2.4 +4.4
Nonres fixed invest +7.8 +17.2 +10.0 +4.4
Res fixed invest -12.3 +25.7 -27.3 +3.4
Net Exports Contrib cut 0.31 cut 3.50 cut 1.70 add 3.44
Inventory Contrib add 2.64 add 0.82 add 1.61 cut 3.70

**Market News International Washington Bureau: (202)371-2121**

[TOPICS: M$U$$$,MU$$$$,M$$FI$,MT$$$$,MAUDS$]