Real GDP Growth Revised Up to a 1% Annual Rate for Q4
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Implications: Real GDP growth was revised up to a 1% annual rate for the fourth quarter, a positive surprise versus the 0.4% the consensus expected. However, the report should not change anyone's impression about the Plow Horse economy. On net, all of the upward revision was due to inventories and international trade, neither of which can be relied on for long-term economic growth. Consumer spending, business investment, and home building were all revised down very slightly. In other words, although Q4 grew faster than previously estimated, the "mix" of growth wasn't as good. Overall, what we have here is another plow horse report. Expect another similar tepid report for Q1. Despite updating their methods last July, it still looks like the government is underestimating real GDP growth by about a percentage point in the first quarter of each year, and then making up for it in the next two quarters. The most important news today was on nominal GDP growth (real growth plus inflation), which was revised up to a 2% growth rate in Q4 versus a prior estimate of 1.5%. Nominal GDP grew 3% in 2015 and is up at a 3.5% annual rate in the past two years. All of these growth rates signal that a federal funds target rate of 0.25 – 0.5% is too low. As a result, look for inflation to gradually move up toward the Fed's 2% target later this year and look for inflation getting above target in 2017.

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Posted on Friday, February 26, 2016 @ 10:52 AM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.