Let’s get the party started.Here’s Deutsche Bank’s Joe LaVorgna with a preview:
We expect today’s Q4 real GDP release to show a 3.5% annualized gain, although the underbelly of the report will likely be even stronger with final sales poised to grow at the fastest pace in nearly five years. No doubt, a mix shift away from inventory investment and toward final demand will give the economic expansion added sustenance. This positive momentum will be reinforced by extremely accommodative fiscal and monetary policy, which in turn causes us to question whether our forecast for 2011 real GDP is too conservative. Before the onset of the last recession, the dollar value of real GDP peaked at $13.364 trillion in Q4 2007. Based on our forecast of a 3.5% annualized gain in Q4 real GDP, the economy will surpass that level and rise to $13.394 trillion. This will officially place the economy in expansion mode. Much of the increase in output is coming through greater consumption and business investment. We estimate real consumer spending grew 4.5% last quarter, led by a massive 23% increase in durable goods expenditures—predominantly coming from auto sales.
Spending on nondurable goods is expected to be up 4.0%, while spending on services should continue to lag, rising just 1.9% in the quarter. While a 4.5% gain in consumption would be the largest since Q1 2006 (+4.5%), we do not believe our forecast is aggressive since the level of real November consumer spending is already up 4.4% at an annualized rate relative to Q3. Another area of strength will likely be equipment and software spending, also known as capex. We are anticipating a record fifth consecutive double-digit gain in capex (+10.0%). A slowdown is highly unlikely given current tax policy.
The accelerated depreciation allowances for capex could add a couple of tenths to real GDP growth this year and next. Companies now have the ability to expense 100% of their capital expenditure this year and 50% next year. This is likely to pull some spending forward into this year and next, thereby lifting capex even more than what we anticipated before the passage of the fiscal stimulus bill. We could see a noticeable payback in capex in 2013, but it is too early in the cycle to fret slowing growth—particularly since consumer spending has yet to accelerate. Given solid gains in consumer and business spending, we estimate that final sales, measured as GDP less inventories, will rise a solid 5.3%. This would be the largest gain since Q1 2006 (5.9%) and would represent the third largest increase in final sales in the last 10 years. To be sure, it is a noticeable improvement from a 0.9% gain in Q3 2010 and an average increase of just 1.1% since the recession ended. Assuming productivity growth slows, which is a critical assumption of ours, then by definition accelerating domestic demand must be met through faster job creation. The risks are certainly tilting toward faster real GDP growth this year than we presently forecast, but we will need to see at least one outsized employment report before we consider altering our projections. This probably did not occur in January, since weather appears to be distorting much of the data.