Economy Expands 2.8% But Growth Drivers To Peter Out

By JASON MA, 

A scramble to restock inventories and a sharp recovery in auto sales helped the economy expand at its fastest pace since mid-2010, but year-end GDP growth missed expectations and may cool off again in 2012.
GDP grew at a 2.8% annual rate in the fourth quarter, the Commerce Department said Friday, below estimates for 3% or more.
Most of Q4's growth reflected a big rebound in inventories. That accounted for 1.9 percentage points of GDP's gain.

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"This report was plumped by the inventory rebound," said Andrew Wilkinson, chief economic strategist at Miller Tabak.
Future quarters are unlikely to see a big boost from inventories.
Excluding stockpiling, the U.S. economy rose at a 0.8% rate, suggesting tepid underlying demand. Final sales grew 3.2% in Q3.
Overall consumer spending rose at a so-so 2% pace despite a solid holiday shopping season and automotive buys surging nearly 38%. That raises questions about how sustainable the recovery is, Wilkinson said.


Government spending at all levels shrank. Fiscal policy is unlikely to boost GDP in 2012.
Meanwhile, business investment nearly stalled. Nonresidential fixed private investment rose at a 1.7% pace, the weakest in two years and down from Q3's 15.7%. Spending on plants or other structures declined, while growth in software and equipment outlays cooled significantly.
Businesses have cash to invest but are hoarding it. For example, Apple (AAPL) reported in its recent quarterly report that it has $97.6 billion in cash and investments, up more than $17 billion from the previous quarter.
On the upside, residential investment jumped 10.9%, the third straight quarterly gain. But much of that reflects construction of apartments, not single-family homes. With foreclosures expected to remain high, demand for rentals will likely outpace anemic demand for owning a home. That will hold back confidence, consumer spending and hiring, Wilkinson said.
Net exports worsened slightly after improving in the prior two quarters. U.S. exports will face more challenges as Europe approaches recession and top emerging markets ease back from their high growth rates.
Incomes have been flat, and households continue to cut overall debt, meaning consumers may be near a limit on how much more they can spend.
"We can't ask the American people to do everything all at once," said Jack Ablin, chief investment officer at Harris Private Bank.
The auto industry should remain strong though, as car sales trends are now closer in line with the labor force, helping sustain sales and output, he added.
The Q4 report comes days after the Federal Reserve cut its 2012 growth target to 2.2%-2.7% from a prior view of 2.5%-2.9%.
The central bank didn't vote for a new round of asset purchases to inject more money in the economy, but Chairman Ben Ber nanke said it remains an option.
Wilkinson, noting the lackluster investment, expects a third round of quantitative easing. Without QE3, 2012 GDP growth will be about 1.5%, he predicted. With it, he thinks that number could double.
The major U.S. stock indexes were mixed Friday, while 10-year Treasury yields continued to drift lower.