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While we do have some favorable-looking headlines out of Europe this morning, indicating that Greece is making progress in its talks with the private creditors, the focus today will be on the U.S. economy. The headlines on that count are on the weak side.
In its first read on the fourth quarter of 2011, the commerce department reported that the U.S. economy expanded at a lower than expected 2.8% pace in the last quarter of 2011, up from the third quarter’s 1.8% growth rate. The expectation was for the GDP number to be 3%, with many looking for growth rates above that level.
Weak spending by the government and consumers drove the miss. The overall composition of the 2.8% growth is also of relatively lower quality, with corporate investments coming down and inventories contributing most of the growth. Personal consumption expenditures (PCE), or consumer spending, which accounts for close to 70% of the economy, increased by 2%, compared to the 1.7% increase in the third quarter and the 0.7% growth in the second quarter. The expectation was for fourth quarter PCE to come in at 2.4%.
The major swing element in today’s GDP report relative to the preceding quarter was inventories, which contributed +1.9% to growth this quarter, instead of being the 1.4% drag in the previous one. Corporate capital spending dropped sharply to its lowest quarterly pace. Business investments in computers and software increased 5.2%, down from the third quarter’s 16.2% pace. This is largely a function of the accelerated depreciation allowance, which pulled forward some of the corporate spending, likely resulting in relatively softer readings through the first quarter of 2012. A major drag on growth came from weak government spending, with defense outlays dropping 12.5%, compared to the 5% increase in the third quarter.
GDP growth rate in the current quarter (first quarter of 2012) is expected to come down to the 2% range, largely due to give back on the inventories front and another quarter of soft corporate spending. But the rate is expected to move up in the back half of the year due to two drivers.
First, the emerging labor market momentum helps improve PCE. Second, corporate spending gets back to trend pace in the following quarters. Thursday’s better-than-expected Durable Goods orders shows strong momentum in corporate spending, meaning that the soft patch in corporate spending will be fairly short lived. This is expected to push quarterly GDP growth rate to the 2.5% range in the second half of 2012.
On the earnings front, Ford (F - Analyst Report) came up short of expectations, though the company reported a big headline earnings number, largely due to a non-cash accounting gain. Ford had problems in Europe and Asia, owing to economic issues in Europe and floods in Thailand.
Procter & Gamble (PG - Analyst Report) came ahead of earnings expectations on in-line revenue in an otherwise noisy quarter. Starbucks (SBUX - Analyst Report) reported better-than-expected results after the close on Thursday, though management’s guidance turned out to be underwhelming.
In other corporate news, Eastman Chemicals (EMN - Analyst Report) announced the acquisition of fellow specialty chemicals maker Solutia (SOA) in a roughly $3.4 billion stock and cash deal. This is an attractive 42% premium for Solutia shareholders, which was a spin-off from Monsanto (MON - Analyst Report) that left the then-parent focused agriculture-related businesses.
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