Fourth quarter GDP revised higher
The Commerce Department's preliminary estimate showed that real GDP expanded at a 1.4 percent rate in the fourth quarter, up from the advance estimate of 0.2 percent. The bulk of the revision came from faster growth in personal consumption expenditures, a smaller trade deficit, and faster growth in government expenditures. Fourth quarter growth offset the 1.3 percent rate of decline posted for the third quarter. Basically, it shows that economic activity stalled during 2001, but the recession, declared by the National Bureau of Economic Research, was mild by historical standards.

The GDP report is essentially old news as we begin the third month of 2002. However, it is useful to look at some components that will give us information about the economy going forward. First and foremost, real final sales grew at a 3.6 percent rate in the fourth quarter, faster than GDP growth. This shows that inventories were liquidated at a rapid clip in the October to December period. In fact, inventories were liquidated throughout 2001. This means that a small pick up in demand will be sufficient to get production on a growth path going forward. It is likely that the worst part of the economic news is behind us at this point.

Manufacturing on the mend!
The ISM manufacturing index gained nearly five percentage points in February to 54.7 percent. This is the highest level in the index since early 2000! It seems that manufacturing activity is expanding after many months of decline. In fact, the new orders and production components each surpassed 60 percent suggesting a strong pace of expansion. But employment and inventories remained below the crucial 50 percent mark, suggesting that factory payrolls may still see some declines in the next couple of months.

Earlier in the week, advance durable goods orders posted a 2.6 percent hike in January after gaining 0.9 percent in December. New orders remain below year ago levels but the chart below depicts a strong improving trend over the past six months. Nondefense capital goods orders, a leading indicator of capital spending, edged up only 0.5 percent in January after declining 1.2 percent in December. Even though orders are nearly 20 percent below year ago levels, they are also on the mend.

In January new orders were spurred by gains in aircraft orders, but the major industries also managed to post healthy gains. New orders for primary metals rose 2.8 percent; fabricated metals gained 1.4 percent; machinery orders increased 2.4 percent; computers & electronics gained 2.2 percent and transportation equipment jumped 5.9 percent (aircraft). Only orders for electrical equipment dropped 5 percent for the month. On the whole, the report bodes well for production in the coming months.

Income, consumption and the savings rate all higher in January
Personal income rose 0.4 percent in January even though wages and salaries were unchanged. The annual cost of living adjustment for social security recipients and government employees helped to boost the total. Disposable income (after taxes) grew a whopping 1.6 percent as tax withholding schedules and a new 10 percent tax bracket helped reduce consumers' tax payments. At the same time, personal consumption expenditures rose 0.4 percent with a sharp drop in durable goods offset by healthy gains in nondurable goods and services spending. Given the strong jump in disposable income, the personal savings rate jumped from 0.6 to 1.8. Keep in mind that the savings rate was depressed in the fourth quarter from the heavy pace of auto sales. January savings were boosted by the rise in disposable income.

Overall, the January income and expenditure data were friendly though not exceptionally robust. Both the Conference Board and the University of Michigan reported their respective surveys on consumer sentiment. Confidence dipped slightly in February, but on the whole not enough to suggest that the consumer is headed toward another pessimistic spell. Such month-to-month dips and wiggles aren't unusual.

Home sales soar
Existing home sales surged in January posting a whopping 16.2 percent jump. At the same time, new home sales plunged 14.8 percent for the month. Are consumers schizophrenic? Not at all - it isn't unusual to see a substitution between new and existing home sales from one month to the next. Since the level of existing home sales is about six or seven times as large as the level of new home sales, this still spelled a pretty phenomenal gain in total home sales for January. In fact, the level is off the charts! It is possible that consumers were worried that mortgage rates would soon rise and gave an extra push into their home shopping in January. Most likely some of the strength was borrowed from the future, as weather conditions were unseasonably warm in the Northeast and Midwest.

Consumers also may be more interested in investing in housing these days because the rate of appreciation is still pretty heady - particularly compared to the stock market. Oddly enough, the chart above, which compares total home sales to mortgage rates, doesn't seem to show the old standby inverse relationship between rates and sales. It appears that rising and falling mortgage rates didn't have a strong relationship to home sales between 1998 and 2001! In any case, the burst of activity in housing may help boost spending on furniture, home furnishings and appliances.

The other construction
On a year-over-year basis, residential construction expenditures are headed down but they are at least positive. Construction expenditures for January did rise 1.5 percent. Nonresidential construction spending jumped 2.2 percent but nevertheless remains roughly 15 percent below year ago levels. The chart below shows that residential and nonresidential investment spending seem to be countercyclical (to each other). It is possible that nonresidential spending will turn around as residential turns down.