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By Jason Stipp | 01-25-2012 12:00 AM

The Number to Watch Out For in Friday's GDP Report

There is a wide range of forecasts for fourth-quarter GDP--set to be released Friday morning--but anything below 1.8% will give the market fits, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar. The government is going to give us its first read on fourth-quarter GDP in a report to be released on Friday. Here with me to give us some sense of how to read that number is Morningstar's Bob Johnson, director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: The GDP report is a very important one because it's so comprehensive. Why is this one such a key report to keep your eye on?

Johnson: I think this one is important because it's going to be continuing a trend. For the full year, when we get this report, I think we'll end up somewhere between 1.8%-2% GDP growth, and that's compared to 2.8% that we saw in 2010, which is kind of a rebound year. Certainly, the tsunami and a few things hurt this year's number that brought it down into that kind of 1.8%-2.0% range.

Stipp: What was the trend that we saw throughout the year, because as you said there were some things that really messed with the GDP number as 2011 proceeded?

Johnson: Yes, and the pattern there looks pretty. I mean we had only 0.4% growth in the first quarter, then we got up over 1% in the second quarter, and then we got 1.8% in the [third], and now we're thinking we'll get somewhere between 2% and 3% here in the fourth quarter.

Stipp: So, we saw GDP start to move up, and you hope to see then--and you said 1.8% in the third quarter--you're hoping that fourth-quarter will be above that 1.8%? Is that what people are expecting?

Johnson: That's the absolute key thing to watch. We could talk about why the number is very, very hard to calculate this time, but the range of expectations is between 2% and 3.5%. But the magic number is that everyone wants [4Q GDP] to be higher than September's 1.8% number. If it's below that, Katy bar the door in terms of the market. I think it will be received by all of us badly.

Stipp: So, 1.8% the key number that people are expecting or hoping that will be better. So, let's dig into the report and what might cause the report to be higher or lower. Consumer, a big chunk of what this report will show us on Friday. What do you expect? The consumer seems like it maybe disappointed a little bit recently at the end of 2011. What are you thinking there?

Johnson: I think that the consumption number will be a little bit weaker than it has been, maybe in the 1.5%-2% range instead of over the 2% that we saw in the third quarter. I think some of the big bounce-back moves were over, and certainly the retail sales report at the very end was a little bit soft. So, that gives us all a little bit of fear that that number may come in not as strong as it has been. You'd like to see the GDP number and the consumption number about the same, but we're going to be just a little bit less on consumption this time, I'm afraid.

Stipp: You said the consumer is a very important thing to watch right now. Do you see this as just a moderation or is this a reason to really start to worry about a consumer trend of weakness?

Johnson: Well, I think that consumption is always something to worry about, and it is 70% of our GDP. I wish the number were a little bit stronger at the end. Certainly, some of it's the housing-equivalent rent and a couple of machinations are going on; the retail sales are probably pretty good, but some of the service categories and some of the things that are calculated relative to housing might look a little bit weaker in the report.

Stipp: So, if consumer might be a bit weaker, what about business spending? Are we seeing that we could get a boost from business spending in GDP.

Johnson: Well, unfortunately, there I think we've had a couple of good quarters. I think we were close to 15% in sequential growth, annualized, in the third quarter. I think we'll be less than that unfortunately in the fourth quarter.

Again, we saw businesses panic maybe even more than consumers in July and August. First of all, businesses adjusted their inventories. Now, as we get into the fourth quarter, they adjusted some of their capital spending thinking Europe was going to be weak.

So, unfortunately, I don't think [business spending is] going to be as big an add as it was in the previous quarters. I think it will still be OK. It will still be a positive number, but it's certainly not going to be as big as it has been.

Stipp: OK, you mentioned inventories there, so that's an important piece of GDP. And it may be a little bit difficult for people to understand how inventories work and they'll view it in different ways.

Johnson: Yes.

Stipp: What's the inventory trend? How do inventories actually affect that GDP number?

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