The last of the surplus inventory of goods created by the recession was absorbed in the October-December period adding as much as four percentage points to GDP growth and spiking the growth rate temporarily to the 5% range in the January 29th report. Dwindling surplus inventory forced a rise in production to meet customer orders. This is what caused the abrupt cut in net layoffs in the fall. With inventories now balanced, GDP growth will now be set by growth in the final demand for goods and services. Domestic demand growth is at best 2% with overall demand growth, including exports, a little over 2%. This is the GDP growth rate expected throughout 2010 in an environment with depressed buying confidence and lingering credit constraints. The growth spike will reach construction demand with lag of many months.
Higher spending in the US economy is boosting the demand for space and facilities. But this will have to persist for several quarters until surplus spaced and facilities are absorbed. Space and facility stocks are not expected to be back in balance until late summer at the earliest.
3rd quarter GDP growth was initially reported to be 3.5% then revised down to 2.4% when more complete data showed that inventory absorption was less than first estimated. Inventories expanded 0.4% in both October and November and are expected to rise at a somewhat slower pace in December. Wholesalers boosted end of November inventory 1.5%, manufacturers 0.2% and retailers cut inventories 0.2%. Nonetheless, retail inventories are the leanest so the December cut will have to be reversed in the next few months. The overall inventory/sales ratio fell to 1.28, just marginally above the long term trend.
Do not misinterpret the 5% GDP growth announcement. Trend economic growth remains in the 2% plus range. The monthly employment report will get an unrelated distortion this spring which could also be misinterpreted as a signal that economic growth have jumped to the above average level. The Census Bureau will hire hundreds of thousands of part-time, low wage workers to convince their neighbors to fill out the 2010 census forms. This will overstate the strength of the labor market for 3-4 months. A large share of the people hired are not looking for full time jobs so the plight of those who need a full time jobs to keep their home and maintain consumption will be helped very little by the census hiring.