GDP In Focus - Ahead of Wall Street

The U.S. economy grew at a slower than expected pace in the last quarter of 2010. The GDP growth rate of 3.2% in the quarter came short of the 3.5% expectation. But it was a meaningful acceleration from the third quarter's 2.6% pace. The headline miss is no doubt a disappointment, but the report's internals are very positive.

The composition of economic growth has meaningfully shifted to more durable and sustainable drivers. Notably, Personal Consumption Expenditures (PCE) or consumer spending in plain language, the largest component of the economy, increased at a 4.4% rate in the quarter. This was the fastest rate in years and a major improvement over the prior quarters.

The shift in growth leadership from inventory investments, which declined in the fourth quarter, to the highly desirable household group, bodes well for the economy's growth prospects in the coming quarters. Residential investments increased at a 3.4% pace in the last quarter of the year, which is a major improvement from the 27% drop we saw in the preceding quarter. Federal government spending dropped in the fourth quarter, compared to being a positive contributor in the third quarter. 

For those who keep track of such things, this GDP report finally pushed the U.S. economy back above the level where it stood prior to the Great Recession. It took the economy six quarters to recoup its lost output, but we are finally back there. It appears that the slowdown that the economy endured in the middle of last year is behind us.

On the earnings front, we had a notable miss from Ford. They missed on EPS, but came ahead on revenue. Softness in Europe and higher commodity prices appear to have weighed on Ford's margins in the quarter. Oil giant, Chevron, beat expectations. Also reporting positive surprises this morning were Honeywell and Dover. Amazon had produced less than exciting results after the close on Thursday. The online retailer beat on earnings, but came short on revenue and gave a ‘softish' guidance to account for its need to spend money on fulfillment centers.

The major news of the day is GDP and not earnings. And despite the headline miss on that front, the market will most likely find the report's favorable internals as positive and reassuring.