Vital Signs: Softer Forecasts for Fourth-Quarter Growth

On tap: January figures on personal income and spending, housing sales, revised fourth-quarter economic growth, and February national and regional factory activity

by James Mehring

It looks like the economy didn't come bouncing back in the fourth quarter as the initial government data first showed. According to economists queried by Action Economics, revised fourth-quarter gross domestic product figures out on Feb. 28 will show a slimmer 2.5% annualized growth, from 3.5% in the initial report.

The main culprit for this reduction lies with a sharper than expected reduction in inventory growth, which in turn corresponded to the weaker housing market and slowdown in demand within the manufacturing sector.

Along with the GDP data, the markets will get to see if conditions in housing and manufacturing are set to improve. Economists will be looking at the January new home sales data for more confirmation that demand remains strong enough for home builders to keep working down inventories. If demand can keep at the recent pace, then the big drag on economic growth from residential construction will dissipate quickly during the course of 2007. However, the January construction outlay data is unlikely to show any turnaround in residential building.

The faster the housing recession ends, the happier manufacturers will be. Housing has hit demand for factory goods and, along with troubles among U.S. auto makers, led to softer demand and a rise in unsold goods during the second half of 2006. The Institute for Supply Management's February factory activity survey and the January durable goods data are the key reports when it comes to assessing the current conditions for manufacturing. However, based on economist forecasts, the reports may give conflicting signals.

Outside of housing and manufacturing, the economy looks a bit healthier. Solid wage and other income gains have allowed consumers to keep spending, with the January figures expected to show more of the same. And as long as consumers' income and spending remains, it will also help home builders and manufacturers get back on track more quickly.

Here's the weekly economic calendar, from Action Economics.