In its second estimate, U.S. GDP was revised to 5.9% by the Bureau of Economic Analysis. That's higher than the first estimate of 5.7% last month. Clearly, an upward revision is generally interpreted as positive news. But looking a little deeper into the numbers might not make the change as hopeful as it appears for the condition of the economy in the fourth quarter.
First, it's worth noting that a positive revision is a drastic change from what we saw with third quarter GDP. In that case, there were two revisions significantly downward. Not only was the forth quarter's revision positive, but it was small. That probably indicates that the original revision wasn't that far off to begin with. At this point, the prospect of seeing next month's final revision much lower than the first isn't very likely.
I went ahead and dug into the numbers. Most of the change comes from a better result in gross private domestic investment. Almost all of its components were better than the first estimate indicated. That makes clear businesses continue to lead recovery. But the biggest upward revision within this category was from the change in private inventories. The first estimate already indicated that this item was the biggest reason for the fourth quarter's rise in GDP. Now it accounts for even more. It was revised to make up 3.9% of the 5.9% GDP growth. It was previously thought to account for only 3.4%. Generally, economists are less impressed with this factor as a sign of present economic health. Instead, it indicates firms believe that a recovery is imminent.
That's pretty much all the good news we've got. The worst news in the report is that personal consumption was even weaker than we thought. We already knew it was worse in Q4 than in Q3. But its contribution to GDP was lowered even further to make up just 1.2%, instead of 1.4%, of the 5.9% GDP growth.
Net exports provided mixed, but ultimately bad, news. In fact, the contribution of exports increased from 1.9% to 2.3%. That's good. But imports were revised up even more, from 1.4% to 2.0%. That resulted in net exports providing an overall smaller contribution to GDP than thought.
Interestingly government consumption was also less than the initial estimate indicated. That was mostly due to state and local consumption in Q4 bringing GDP down by 0.3%, instead of remaining flat -- as the original estimate indicated. Federal spending was essentially unchanged for the quarter and had no revision.
So it's always nice to the GDP number revised up, but the reasons why are less than impressive in this case. Although businesses do appear to be helping the recovery effort through more private investment, most of their contribution came from firms building inventories. Other measures, especially consumption, were quite weak -- and even worse than we thought in the first estimate.
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