It now looks like the alleged growth rebound in Q4, from the 2.0% of Q3 to the 3.5% of Q4 was an illusion based on incomplete data. Based on recent data on inventories for December (much lower than initially predicted by BEA) and today’s December trade balance figures (much worse than initially forecasted by BEA) the initial estimate for Q4 growth will be revised downward to 2.0% or at best 2.2%. Indeed 2.2% is today’s revised estimate by JP Morgan, one of the most bullish – on US growth - investment houses. In a research note today they said: “A  wider  than  expected  December  trade deficit leaves fourth quarter GDP growth  tracking  2.2%,  down  from  the  advance estimate of 3.5%.”.

So, the alleged growth rebound in Q4 actually did not occur. Indeed, as BEA had estimated strong consumption in Q4 and in December, it was odd that one would expect an improved trade balance in December: all those plasma and LCD TVs and consumer electronics - that were at the center of the holiday consumption binge - are imported. And indeed the December trade figures today showed the obvious: a large chunk of the consumption boom during the holidays went into imports (see Brad Setser's analysis of the 2006 data). So with much lower inventory accumulation (adding almost 1% to their initial estimate of drag on Q4 growth) and much higher imports and a worse trade balance don’t be surprised if the new estimate of Q4 growth will turn out to be close to the 2.0% of Q3, i.e. no growth rebound in Q4 relative to Q3. 

What does this revised Q4 GDP imply for Q1 2007 and the rest of 2007 growth? My view is that in 2007 we will observe a slowdown in consumption growth, falling fixed investment in all of its three components (residential, structures, equipment), further inventory adjustment (as that adjustment cycle is not even half way under way), trade becoming again a negative drag on growth (starting in Q1) and government consumption being a modest source of growth. Add to this aggregate demand weakness a continued and worsening housing recession and its spillovers to other sectors and to the manufacturing sector. Then, the result is a growth recession if not worse, starting in Q2 of 2007. Let me explain in detail why…