Highlights
The economy slowed sharply in the final quarter of 2007 but inflation picked up significantly. Fourth quarter real GDP eased to an annualized 0.6 percent, following a robust 4.9 percent surge in the third quarter. The consensus had forecast that fourth quarter GDP would post a 1.2 percent gain. Higher oil prices led to a jump in the GDP price index to an annualized 2.6 percent, following a 1.0 percent rise in the third quarter. The Fed in recent months indicated that it cares about overall PCE inflation as much as core and the latest numbers should be worrisome. The overall PCE price index jumped to an annualized 3.9 percent from 1.8 percent in the third quarter. The core PCE price index also quickened but not as much, rising an annualized 2.7 percent in the fourth quarter, after increasing 2.0 percent the prior quarter. The latest GDP numbers point to the Fed's likely quandary. The economy is slowing but will inflation also ease enough so the Fed does not have to quickly boost interest rates back up after the economy stabilizes. Also, this morning's ADP figure for private payroll gains came in at a strong 130,000. The Fed has a lot to mull over this morning as somewhat dated GDP numbers show a soft economy but newer ADP numbers indicate a stronger economy.

The deceleration in fourth quarter growth was due to a slowing in growth of personal consumption spending, business fixed investment, government purchases, a worsening in residential investment, and a decline in business inventories. Net exports actually improved despite a slowing in export growth as real imports growth slowed sharply. While the numbers were slower, personal consumption of durables and also business fixed investment were still moderately healthy-especially for structures. It should be noted that much of the softness in was in inventories. Real final sales held up at a stronger pace, rising a annualized 1.9 percent, following a 4.0 percent surge in the fourth quarter.

Year-on-year, real GDP growth slowed to up 2.5 percent in the fourth quarter, down from up 2.8 percent in the third quarter. Year-on-year, the GDP price index came in at 2.6 percent in the fourth quarter, up from up 2.4 percent in the previous quarter.

The economy slowed more than expected but the good news is that a lot of it was in inventories. Demand has held up decently. Taking into account how strong the prior two quarters were, the fourth quarter deceleration is not as troublesome. Today's numbers can be used by the Fed to build a case for either a large rate cut, a modest cut, or even none at all. While the economy could go into recession, there is nothing in the fourth quarter data to suggest anything other than very shallow numbers. Today's ADP numbers, however, indicate no recession. The question is whether the Fed wants more anti-recession insurance or whether the Fed thinks it's time to quit fueling future inflation.

2008 Release Schedule

Released On: 1/30 2/28 3/27 4/30 5/29 6/26 7/31 8/28 9/26 10/30 11/25 12/23 Released For: Q4a Q4p Q4f Q1a Q1p Q1f Q2a Q2p Q2f Q3a Q3.08p Q3f