Fourth Quarter GDP Breakdown

After three quarters in a row that averaged roughly 1.2%, the fourth quarter real GDP grew 2.8%, a bit below expectations of 3.0%.  Since the price deflator was up just .4% versus the estimate of 1.9%, nominal GDP (measure of growth not adjusted for inflation) was up 3.2% versus the estimate of 4.9%.

Personal consumption rose 2.0%; fixed investment rose 3.3%, helped by a 5.2% increase in equipment spending and residential construction rose by 10.9%. Government spending was a drag on GDP growth lead by a 12.5% decline in national defense spending.  State and Local government spending fell by 2.6%.  Inventories added roughly 2% to GDP growth, but final sales rose just .8% versus 3.2% in the third quarter.  This shows that inventory rebuild played a large part in the fourth quarter GDP increase.

Bottom line is the economic environment continues to be mixed, but positive.  We have to watch the European slowdown for potential impact on our domestic recovery.

Existing Home Sales Increase

The latest monthly data shows total existing-home sales rose 5.0 percent to a seasonally adjusted annual rate of 4.61 million in December from a downwardly revised 4.39 million in November, and are 3.6 percent higher than the 4.45 millionunit level in December 2010.

Total housing inventory at the end of December dropped 9.2 percent to 2.38 million existing homes available for sale, which represents a 6.2-month supply at the current sales pace, down from a 7.2-month supply in November.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate

(SAAR) basis since 1993.  Sales in December 2011 (4.61 million SAAR) were 5.0% higher than last month, and were 3.6% above the December 2010 rate. 

Expect the Unexpected

It is always interesting to see a tremendous amount of advice the New Year brings, an exercise which requires a considerable investment of time and attention by writers, despite the fact that markets tend to be indifferent to what month or year is on the on a calendar.  Our view of 2012 is that it will likely be marked by a continuation of the trends that were so obviously in place at the end of 2011 – mainly uncertainty.

The interesting thing about the latter portion of 2011 and now the start of 2012 is that it witnessed one of the clearest dispersion of returns in asset classes that we have seen in over a decade.  In addition, the US economy seems to be involved in a weak recovery as evidenced in the latest round of economic data.  Although this contradicts leading economic indicators which show the economy could be slowing down dramatically as we move through 2012.  We suspect that in this post crisis era economic recoveries which gain no real traction, such as the one we are in, will likely display a constant conflict in the data between recovery and possible recession, until one or the other becomes more obvious.

If at some point this year this recovery gains more momentum it will provoke a reconsideration of the Federal Reserve’s very accommodative stance.  This could be the greatest risk in 2012 simply because no one believes it.  We don’t believe the Fed will change its stance, mainly because this is an election year, but we want to be aware of the possibility of a surprise move.  We can follow the bond market for clues.  Right now bond investors don't expect rates to rise anytime soon.

Indeed the effect of the Federal Reserve’s promise not to raise rates prior to 2013 has been to encourage investors to take more risk than would otherwise be prudent and build portfolios around this premise.  However, we should be aware that the Fed has a dual mandate which concerns employment and inflation (not yet problematic but hardly non-existent).  We would imagine that if US economic data continues its recent path then pressure will grow within the divided FOMC to reconsider its accommodative stance.

As we head into 2012, we believe this could prove to be another interesting year.  In a world filled with uncertainty, one thing is probably certain – the markets have never experienced two flat years in a row.  This could be the year to expect the unexpected.