Net exports were basically neutral for growth in Q4, but this could easily revert to a net drag as the European recession builds momentum. The weakness in demand, alongside growth in production, resulted in a $56 billion inventory build, which we should expect to at least partly reverse in the current quarter. Stockpiling alone added 1.9 percentage points to the headline GDP number, which account for about two-thirds of the overall pickup in the economy last quarter.
Stripping out the inventory components reveals an economy with an uncomfortably soft underbelly — and a key reason why the Fed is now going to step it up a notch or two on the monetary easing front. We are now well into year-three of what is an extremely tepid and fragile economic recovery, and one that could easily tip over at any time with even the smallest of negative exogenous shock(s). There is very little cushion in these numbers.
Update: The fact that consumer spending could only come in at a 2% annual rate even with yet another rundown in the personal savings rate (from 3.9% to 3.7% — it started off the year at 5.0%) is also problematic. In fact, if the savings rate had not come down in recent quarters as it did, real consumer spending would be contracting, and along with it the overall economy.
Now there is no doubt that employment conditions have improved of late, but this seems to tower more to Corporate America hitting some productivity constraints rather than a pickup on overall economic activity. Not only that, but because of all the excess slack in the labour market, real incomes are not growing even with the jobs pace gaining ground. Real disposable income could only eke out a 0.8% annualized gain in Q4 after two negative readings.
In fact, on a year-over-year basis, real PDI is down 0.1% (imagine that 1.64 million in nonfarm payroll gains in the past year managed to generate a 0.1% decline in real disposable income). There may not be a recession in real GDP, but there sure is one in real after-tax personal earnings; never before have they dipped below the zero line on a YoY basis without there being an overall contraction in the economy. Maybe it will be different this time (famous last words), but 80% of the income pie is already there.