Growth and Inflation Surprise to the Upside

Economic output was revised higher last week on the back of an upward adjustment to inventories. GDP during the fourth quarter of 2015 grew at 1.0% compared to an initial reading of 0.7%. The adjustment to fourth quarter growth largely reflects how unsold goods are valued. In inflation-adjusted terms, inventory accumulation was larger than previously estimated due to a revision in underlying price data. In addition, the trade gap, which measures the difference between exports and imports, was initially estimated to have shaved 0.47% from GDP, but weighed less on growth in the latest reading, having shaved off only 0.25%. While consumer spending disappointed, printing at 2.0% versus a 2.2% expectation, wage inflation did show some signs of life, with personal income growing 0.5% in January versus 0.3% in December. PCE, the Federal Reserve’s choice measure of inflation, also impressed, rising 0.3% in January from December, the biggest gain since 2012. The print pushed the year-over-year measure of costs up to 1.7%, exceeding the Fed’s official forecast for the fourth quarter of 2015. Overall, the stronger than expected report should give the Fed some confidence, and may marginally increase the likelihood that it continues to raise interest rates at its March meeting. It is important, however, to remind ourselves that PCE is still running below the Fed’s 2% target, and a strong U.S. dollar is likely to weigh on the manufacturing sector and domestic growth in the near to medium term. 

Sources: Bloomberg, CRT