GDP - Gross domestic product. Think of it as all the stuff produced within the borders of the US. The top line number reported today: "The economy grew by 5.75 annual rate in the fourth quarter" sounds too good to be true. And, well, it is.
Over the past 15 months companies have been shrinking inventory very rapidly. Imagine it is July 2008 and you work for Sony. Make a guess on how many 42" LCD TV's you'll sell during the Christmas season. Then watch the bottom fall out of the economy. What will you do with your inventory of TV's? Rationally, you'd cut the price, sell all you can and slow production of new TV's.
That's what happened in every industry from October 2008 to October 2009. By October 2009 inventories shrank to a level that companies decided, "Oh, maybe we better start producing again."
That's very good news, but it also inflates the GDP number.
Take out inventories and the economy grew a 2.2% annual rate.
The number that is more important to me is the jobs report we'll get next Friday. November's numbers were too good to be true. December's were a dissapointment. I believe Wall St. has way over played this recovery. (In other words, stock prices are too high given the current economy.) The real recovery doesn't begin until jobs return. I hope next Friday's news is as a pleasant surprise like today's.
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