GDP = C+I+X+G... But Something is Missing

2012 Q4 GDP surprised everyone with a negative print (-0.1%). This was the first negative read since 2009 Q2 (-0.3%), and occurred despite a 2.2% increase in personal consumption expenditure, the largest component of GDP, making up more than 70%.

The culprits for the negative GDP read were "change in private business inventories" and "expenditure on national defense". Inventories peeled off 1.27% from GDP, while defense spending subtracted another 1.28%.

Why inventories were depleted during Q4 is anyone's guess. One can blame Hurricane Sandy, which impacted much of the US north-east during that period. It created logistical nightmares. Businesses had to rely on their stock to satisfy customers. This is kind of counter-intuitive given that retailers like Kohl's and JC Penny had "over-inventory" problem during Q4 because of warmer than expected weather. Be as it may, if it was unintentional withdrawal of inventory, it should boost GDP in Q1. We'll see if that happens.

A sharp reduction in defense spending in Q4 is also puzzling especially given that defense contractors like Lockheed Martin, Boeing and Northrop Grumman reported decent Q4 numbers. I have not heard any plausible reason yet but may be there is.

US stock markets did not react too negatively to Q4 GDP because nobody believed it. A normal reaction to such number would have been Dow opening down 200 points. The market did end the day down and at the lows of the session but that's more to do with the FOMC announcement than GDP ("sell the news" trade).