3 Pluses From the 'Weak' GDP Report

Economic growth slowed sharply in the fourth quarter, but there are signs of underlying strength.

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If today's surprisingly weak fourth-quarter gross domestic product report—the economy grew at a worse-than-expected 0.6 percent annual pace—is a sure recession harbinger, then why is the stock market not falling off the cliff? And why is the "recession in 2008" contract at the Intrade betting market down by 9 points to 60 percent, meaning a recession is now considered less likely? Three reasons:

1) The big negative for growth was a drawdown in inventories by business. That subtracted 1.3 percentage points from growth. But as Nigel Gault of Global Insight explains, "that suggests that companies are keeping their inventories lean, making it less likely that they will need to slash production in the future."

2) The consumer still seems relatively healthy. Consumer spending rose at a decent 2 percent annual rate. (Business fixed investment was even stronger, climbing at a 7.5 percent pace.) Real final sales, a measure of underlying demand, rose at a fairly solid 1.9 percent annual rate.

3) The January jobs number on Friday might be pretty strong. Today's ADP national employment report predicts that private nonfarm payroll employment rose by 130,000 in January from December. Assuming government payrolls expand by 22,000 (the average monthly increase over the past 12 months), this implies an estimated 152,000 increase in total nonfarm payroll employment. That is well above the latest Bloomberg consensus estimate of a 65,000 gain.

Consider this: When the economy shrank in the first quarter of 2001, it lost 13,000 jobs in January, gained 80,000 in February, and lost 43,000 in March. When the economy shrank again in the third quarter of 2001, it lost 117,000 jobs in July, 154,000 in August, and 255,000 in September. It sure looks as if the labor market will continue to support the economy this time.