January 27, 2017 07:30 CST

Consensus Consensus Range Actual Previous
Real GDP - Q/Q change - SAAR 2.2% 1.8% to 3.3% 1.9% 3.5%
GDP price index - Q/Q change - SAAR 2.1% 1.8% to 2.4% 2.1% 1.4%

A perhaps unwanted build in inventories drove up fourth-quarter GDP which, however, could only manage 1.9 percent annualized growth. Inventories added 1 percentage point to the quarter in a build that will have to be worked off given weakness in final demand which rose only 0.9 percent and down from 3.0 percent in the third quarter.

A positive is personal consumption expenditures which rose at a 2.5 percent pace. Though this is down from 3.0 and 4.3 percent in the prior quarters, it's still a respectable result that underscores the consumer's support of the economy. Durable spending showed the most consumer strength in the quarter reflecting strong auto sales.

Other positives include strength in residential investment, at a very strong plus 10.2 percent rate, and an unspectacular but very welcome increase in business investment at 2.4 percent for the third gain in a row.

A one-time negative in the report is an outsized pull lower from net exports, which subtracted 1.7 percentage points from the quarter but reflect unusually strong soybean exports in the third quarter.

Heavy inventories will work to pull back production and employment in the ongoing quarter. But the wildcard is still the consumer who, benefiting from a strong jobs market and strong confidence, can still give the first quarter a lift.

Market Consensus Before Announcement
The first estimate of fourth-quarter GDP is expected to come in at a consensus plus 2.2 percent, down from 3.5 percent in the third quarter. Negatives look to be a wider trade gap and perhaps a slowdown in consumer spending, which had been very solid at 2.8 and 4.3 percent in the prior two quarters. An unwanted plus may be a build in inventories. Such results would contrast with the post-election surge in both consumer and business expectations. The GDP price index, which was subdued in the third quarter at 1.4 percent, is seen firming to 2.1 percent, the result in part of higher energy prices.

Gross Domestic Product represents the total value of the country's production during the period and consists of the purchases of domestically-produced goods and services by individuals, businesses, foreigners and government entities. Data are available in nominal and real (inflation-adjusted) dollars, as well as in index form. Economists and market players always monitor the real growth rates generated by the GDP quantity index or the real dollar value. The quantity index measures inflation-adjusted activity, but we are more accustomed to looking at dollar values.

Household purchases are counted in personal consumption expenditures -- durable goods (such as furniture and cars), nondurable goods (such as clothing and food) and services (such as banking, education and transportation).

Private housing purchases are classified as residential investment. Businesses invest in nonresidential structures, durable equipment and computer software. Inventories at all stages of production are counted as investment. Only inventory changes, not levels, are added to GDP.

Net exports equal the sum of exports less imports. Exports are the purchases by foreigners of goods and services produced in the United States. Imports represent domestic purchases of foreign-produced goods and services and must be deducted from the calculation of GDP.

Government purchases of goods and services are the compensation of government employees and purchases from businesses and abroad. Data show the portion attributed to consumption and investment. Government outlays for transfer payments or interest payments are not included in GDP.

The GDP price index is a comprehensive indicator of inflation. It is typically lower than the consumer price index because investment goods (which are in the GDP price index but not the CPI) tend to have lower rates of inflation than consumer goods and services.

GDP is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Investors in the stock market like to see healthy economic growth because robust business activity translates to higher corporate profits. Bond investors are more highly sensitive to inflation and robust economic activity could potentially pave the road to inflation. By tracking economic data such as GDP, investors will know what the economic backdrop is for these markets and their portfolios.

The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Gross domestic product is the country's most comprehensive economic scorecard.

When gross domestic product expands more (less) rapidly that its potential, bond prices fall (rise). Healthy GDP growth usually translates into strong corporate earnings, which bode well for the stock market.

The four major categories of GDP -- personal consumption expenditures, investment, net exports and government -- all reveal important information about the economy and should be monitored separately. One can thus determine the strengths and weaknesses of the economy in order to assess alternatives and make appropriate financial investment decisions.

Economists and financial market participants monitor final sales -- GDP less the change in business inventories. When final sales are growing faster than inventories, this points to increases in production in months ahead. Conversely, when final sales are growing more slowly than inventories, they signal a slowdown in production.

It is useful to distinguish between private demand versus growth in government expenditures. Market players discount growth in the government sector because it depends on fiscal policy rather than economic conditions.

Market participants view increased expenditures on investment favorably because they expand the productive capacity of the country. This means that we can produce more without inciting inflationary pressures.

Net exports are a drag on total GDP because the United States regularly imports more than it exports, that is, net exports are in deficit. When the net export deficit becomes less negative, it adds to growth because a smaller amount is subtracted from GDP. When the deficit widens, it subtracts even more from GDP.

Gross domestic product is subject to some quarterly volatility, so it is appropriate to follow year-over-year percent changes, to smooth out this variation.