By Carlos Guillen

Equity markets are continuing to trade slightly in the red during today's trading session as economic data shows rather mixed results with better than expected consumer sentiment figures but with worse than forecasted gross domestic product growth.

The University of Michigan Consumer Sentiment January result landed at 75.0, which was higher than the Street's expectation of 74.2, increasing from the 69.9 reached last month, representing the fifth consecutive month-to-month increase, and standing at the highest level since May 2011. This result was also an improvement to the prior Michigan estimate of 74.0. The better than expected result comes as consumers see that the employment situation has been improving. The recent gains in equity markets are also serving to fuel confidence as consumers' perceived wealth improves. Clearly, the uptrend in consumer sentiment is very encouraging, but all is still not well. As it stands, consumers remain deeply skeptical about the prospective strength of the economy. While consumers have been seeing job improvements, they are not optimistic that this will continue. At the same time, more consumers have reported experiencing income declines, and very few, about one in eight, expect their income to grow faster than inflation.

The real drag on the market has been this morning's GDP report. While typically this number has a negligible effect on markets, as it is backward looking, the concern has been that inventories have been building at an accelerated rate. Real GDP growth during the fourth quarter of 2011 was measured at 2.8 percent, below the Street's estimate of 3.1 percent, but still higher than the third quarter GDP growth of 1.8 percent. The thing that is frightening investor is that the change in private inventories of 10.9 percent was so large that it is likely that this type of growth will not be met in this first quarter; consumption would have to increase at a much faster rate to make up the difference, and investors are skeptical this will happen; more on this below.

GDP Heebie Jeebies
David Urani

Q4 GDP is in the books and overall you'd have to say it was not quite up to snuff. The headline increase of 2.8% fell short of the 3.1% consensus, and while that is a little bit soft, on another day it may not do much to dent the market. The devil is in the details, where a few different metrics suggest that the soft headline number was not even as strong as it appears.

But we'll start off with the one nugget of decent news, which is that personal consumption, the engine of the economy, increased by 2.0% for the quarter. That was up from 1.7% in the previous quarter, and it contributed 1.45% of the 2.8% headline GDP increase. Not a blowout but at least steady improvement.

Now let's talk about where the result goes awry. I think the most alarming item, and what may have sparked most of the market pullback, was the build in inventories. Increases in inventories contributed a hefty 1.9% of the 2.8% headline GDP figure. That indicates that most of the increase in GDP in the fourth quarter was restocking rather than end demand. "Final Sales," (which essentially takes the headline number and removes the inventory build) an indicator of end demand, were up 0.8%. That was a notable drop-off from 3.2% in the third quarter and 1.6% in the second quarter. Another side effect of a big build in inventory could be the onset of discount sales in 1Q.

One last issue was the price index which is used to adjust the numbers for inflation. The report has the price index rising by a surprisingly low 0.8% whereas it was widely expected to be similar to the previous quarter's 2.0% reading. The drawback to that, for some investors, is that the nominal unadjusted figure of the GDP dollar value will have been lower than many were imagining it to be.