GDP came in at a lackluster 2.6% for the 4^th Quarter, missing expectations of a 2.9% growth rate. Markets did not react as you would expect, but why?

GDP was expected to be a strong 2.9% for the 4^th Quarter–rounding out a year of accelerating growth.  Instead we got 2.6% growth which is still an acceleration, but not at the pace expected.

When we dig into what dragged GDP down in the 4^th Quarter, we find that a falling dollar increased the trade deficit which in turn hurt GDP. Inventories fell over the quarter, but that should actually be helpful to a typically weak 1^st Quarter as they rebuild.

The real story was that the consumer was strong during the quarter, increasing consumption 3.8% year over year. This is extremely meaningful as the consumer makes up 70% of GDP and is responsible for much of the 2.6% increase. As a result, the markets continued their climb on the “lackluster” report.

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