Economic Outlook: Lesser expectations

The U.S. gross domestic product for the fourth quarter almost reached expectations, coming in at a relatively lively 2.8 percent in a preliminary estimate.

Economists expected growth of 3 percent, generally because the U.S. GDP is heavily slanted toward consumer spending, which makes up about 70 percent of the total domestic output.

Consumer spending offered a good-news/bad-news scenario, analyst say. It picked up considerably, but to such a degree that it will be hard for consumers to sustain the effort.

The good news: Hiring, which slumped in the middle of the year, picked up speed as 2011 progressed. With more jobs, consumers spent more.

The bad news: Consumers in 2011 began to spend part of their savings again. There's discretionary spending and then there's foolhardy spending. The latter is not sustainable.

Of course, the GDP is always relative. The economy has not grown as quickly in 18 months and is going gangbusters when compared to Europe. But what isn't going gangbusters when compared to Europe?

In comparison, Britain's economy shrank 0.2 percent in the fourth quarter – also a preliminary figure – and Germany's economy shrank 0.25 percent September through December.

Here's a telling figure: Non-residential fixed investment, which is investment by businesses, grew a lethargic 1.7 percent in the fourth quarter, down from a scorching 15.7 percent in the third quarter.

Business inventories react like a comedy in which 10 people are running in a line and the person in front stops, so all the others cascade into a bundle of collisions behind the front of the line. Inventories are all hurry-up-and-wait. Consequently, businesses are building up inventories now because consumers began spending in November. By the time businesses react to a slowdown in spending, there will be too much investment to stop the momentum quickly enough.

That means the GDP will look inflated in the middle of the year, when the inventory is there but consumers are not keeping up.

Bottom line: The trading gap widened toward the end of the year. The import-export imbalance is a $45 billion per month black hole. That's why growth of 2.8 percent sounds pleasant, when it is really pernicious. It isn't high enough to bring unemployment down.

The United States, like any business out there, needs customers other than itself.

In international markets Friday, the Nikkei 225 index was flat, down 0.09 percent and the S&P/ASX 200 in Australia was up 0.4 percent. The Hang Seng index in Hong Kong rose 0.31 percent and the Sensex in India rose 0.92 percent.

In midday trading in Europe, the FTSE 100 index in Britain dropped 0.96 percent, while the DAX 30 in Germany fell 0.47 percent. The CAC 40 in France lost 1.1 percent and the Stoxx Europe 600 dropped 0.72 percent.