GDP 4Q 2009 Up 5.9%? A Bottom-up View Shows Mixed Signals

The initial reports on U.S. gross domestic product came in strong for 2009's fourth quarter, with overall growth of 5.9 percent (annualized). The components, however, are still somewhat off: consumption spending is still below normal, although that's no surprise, and once again there was an odd contribution from inventories, where a decrease in goods on hand somehow adds to growth.

In this post I will try to square what we see in the macro view with the results on the ground from corporate America -- the size of sales gains in the fourth quarter, and how well they compared with expectations.

First the details from the Bureau of Economic Analysis:

Relying on the contributions to GDP from 2005 through 2007 as a guide to what's normal, or at least recent:

• Consumption spending should be higher, at something closer to two percent.
• Investment in total is hard to read; let's say its contribution should be 0.75 percent.
• Within investment, the contribution for changes in inventories reflects slowing inventory liquidations and therefore increased production. It's an extreme reading, and made up much of the fourth quarter gain, but it's a valid positive sign, says David Hensley, Director of Global Economics Coordination at JPMorgan Chase. (The explanation is a little complicated, but I welcome inquiries from interested readers.)
• Net exports are in the ballpark, while slowing government expenditure is due to small decreases in spending on national defense and state and local governments.

The table below breaks out the S&P 500 by industry, ranked by the proportion of companies that beat their earnings estimates for 4Q 2009. Those industries higher up in the table had the best news to tell. (Keep in mind that in a typical quarter, something like 75 percent of companies "beat" the estimates they lead analysts to project.) The highlights and lowlights:

Information technology was strong due to blowout sales of semiconductors (revenues up 26 percent from a year earlier), and strong sales of computers (up 10 percent), software (8 percent) and internet software and services (11 percent).

Consumer discretionary strength came from autos (up 19 percent) and internet and catalog retailers (up 39 percent). Health care benefited from gains in pharmaceutical sales.

Industrials saw double-digit sales drops in machinery, construction and engineering, and road and railroad equipment. Caterpillar had a 39 percent drop in sales.

But the employment picture is still bleak at large companies. Even though the nationwide unemployment fell in January, there were many large layoffs for the month, leading to 63 thousand initial unemployment claims (see the upturn illustrated below, from the BLS "mass layoffs" report). Consistent with what we just saw in the revenue numbers, manufacturing companies are still contracting.

It's curious, but the largest mass layoffs in January were in an area that has seen recent strength in other government reports -- temporary services. The BLS reported temporary services job gains in November, December and January of 95 thousand, 59 thousand, and 52 thousand, respectively. One step forward, two steps back.