America beats expectations

The US economy grew in the fourth quarter even more than previously thought.

The second estimate of gross domestic product, released Friday morning, was 1%.

Economists had forecast a lower pace of growth than the advance estimate showed, at 0.4% quarter-on-quarter, compared with 0.7% in the first release.

The economy was boosted by an upward revision to the value of business inventories. Also, fewer purchases from outside the country shrank the drag on growth from the gap between exports and imports — the so-called net trade deficit.

But the growth rate of personal consumption was revised lower, to 2% from 2.2%.

All this has some economists saying the improvement the US saw happened in all the wrong places.

Millan Mulraine of TD Securities wrote to clients: “Even though the 1-handle on GDP is in contrast to the expectation for a downward revision to 0.4% q/q, the improvements occurred in the wrong places. In the first place, the downgrade in consumption activity speaks to a softening in a key component of GDP and the sharp upward revision to inventories will result in a weak hand-off to Q1 GDP tracking.”

Pantheon Macroeconomics’ Ian Shepherdson wrote, “Other things equal, the upward revision to inventories implies weaker growth than currently expected in Q1, because the difference between the level of inventory and where it needs to be — in order to restore prior norms, relative to sales — is bigger than previously believed.”

Core personal consumption expenditures, which measures prices consumers pay for goods and services excluding volatile food and energy costs, rose 1.3%, versus an expected rate of 1.2%. It is also the Federal Reserve’s preferred gauge of inflation, and so this improvement is likely a plus for the Fed’s outlook.

For all the talk of an imminent recession, the median forecasts show that GDP is expected to rebound in the first quarter to about 2%.

And Bloomberg’s median forecast does not show a growth rate of less than 2% out to the third quarter of 2017.

Real GDP for the year 2015 was pegged at 2.4%, the same rate as the prior year.

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