Fourth-Quarter GDP Not A Trendsetter

Housing proved yet again that the industry isn't firing on all cylinders just yet. Every positive housing data point seems to be followed by one that is less than robust. I truly think that the housing market has bottomed out, but it is a two steps forward, one step back process--just like the overall economic recovery in 2009. This month, home pricing looked better, but both pending home sales and new home sales weren't as robust as I had hoped. No disaster, but the industry lost momentum instead of building on the previous month's strength.

Based on the government's new orders report, it looks like better days are in store for manufacturing, especially for autos and airliners. Inflation-adjusted GDP growth in the fourth quarter came in at 2.8%, a number that would have been considered shockingly good just a few months ago, but managed to disappoint investors that had hoped for even more. The fact that a good deal of the GDP improvement came from higher inventories didn't do wonders for investment sentiment, either. The report proved even more difficult to interpret than I had expected. I take some solace in that the all-important consumer sector did better than expected and actually accelerated between the third and fourth quarters.

Earnings Season a Mixed Bag
Instead of being uniformly good, earnings this time around have been a real mixed bag.  Apple (AAPL) had a blowout quarter on the upside, while Ford (F) disappointed. While manufacturers generally reported strong results, most noted at least some slowing in China. Surprisingly, comments about Europe seemed to suggest fewer problems there. Financials were definitely mixed, depending on products and markets served. Housing reports were also mixed. After strong housing news last week, NVR (NVR) disappointed while DR Horton (DHI) appeared to do well.  Overall, I suspect even as the U.S. economy continues to do well, corporate earnings could continue to slow due to exposure to Europe and China as well as corporations' inability to pass along any price increases.

Fed Promises to Keep Rates Low Through Late 2014
The big news of the week was the Federal Reserve's report that it intended to keep rates low all the way through late 2014. The boldness of the new extended time frame managed to shock the Street, which had expected a ho-hum, more-of-the-same type of report.

Personally, I don't agree with the policy, and I don't see how it helps, except by maybe helping speculators finance their commodity purchases. And the low rate policy is really beginning to pinch savers and hurt the personal income report in a meaningful way--not to mention the damage it may be doing to cash-strapped pension funds. Furthermore, the dramatic length of time certainly destroys any sense of urgency for either homebuyers or corporations considering large capital budget expenditures. Why buy today when rates are going to stay low forever, especially with all the European uncertainty? Well at least it made the Street happy for now.

GDP Sets the Right Trend, But There Are Lots of Moving Pieces
As I had speculated in this week's video, real GDP jumped 2.8% in the fourth quarter. However, the consensus was a 3.1% increase, so investors were disappointed in the overall result, especially with inventory investment being a major source of growth. However, the consumer did better than I had hoped and I would certainly rate the overall GDP report as a positive.

Certainly one of the more positive aspects of the GDP report was the overall trend, which remains up--at least for now. Supply-chain issues related to the Japanese tsunami, a spike in gasoline prices related to the Arab Spring movement, and horrid weather stalled growth in the first half, which reversed itself in the second half.

As much as I liked the report, the 2.8% growth does not represent a new baseline.