For U.S. gross domestic product growth, the disappointment devil is in the details.
Real GDP grew at a solid 2.8% annual rate in the fourth quarter, slightly missing 3.0% expectations, but still the best gain since second quarter of 2010. The report, however, was a big disappointment for investors and the outlook because of what hid underneath. The mix of growth suggests weakness this quarter and perhaps beyond.

That’s because the bulk of GDP growth came from the inventory sector, which accounted for almost two percentage points of the top-line expansion. The amount of inventory added last quarter was the largest since the third quarter of 2010. In contrast, real final sales — GDP minus inventories — grew by only 0.8%, the weakest pace since first quarter 2011.
The problem with inventory growth powering GDP is the uncertainty over what motivated the buildup.
If businesses stored more supplies and finished goods in their warehouses because they see future demand growing at a solid pace, then the stockpiling can be viewed as a positive sign of business confidence and for growth going forward.
If, however, businesses stockpiled in anticipation of more demand than materialized, then they ended the fourth quarter with a load of unwanted goods. If so, the buildup is a negative for the outlook because businesses will have to draw down their existing stockpiles first before ordering more supplies and merchandise.
The monthly data so far don’t suggest excessive inventories. Government data through November show inventories were in line with the level of sales back then. The Institute for Supply Management’s survey of manufacturers also raises no red flags in December.
The ISM’s survey of nonmanufacturers does show some concern that inventories are a bit too high. But even in this sector [mainly services firms], 67% of respondents said their inventory levels were “about right” in December.
Given the large buildup at end-2011, inventories are surely subtracting from this quarter’s GDP growth. After that, inventory management will depend on demand, especially from consumers.
That’s why the January rise in consumer sentiment is good news for future growth. But the sentiment report warned, “The recent gains in confidence are now critically dependent on continued job gains.”
The report went on to say that real consumer spending could grow by 2.1% in 2012, but that will depend on “modest” employment gains in the future.