Given yesterday’s Census Bureau data on retail and wholesale inventory, there was a solid though not necessarily good reason to suspect how today’s BEA report on US real GDP might surprise to the upside. The way GDP is tabulated, inventory contributes to the figured increase; the bigger the inventory build, the higher calculated output goes.

The fourth quarter’s increase in total economic output when compared to the third quarter had widely been expected at around 5.5% (q/q, SAAR). That was already anticipated to be a nice rebound from prior quarter, Q3 over Q2 when real GDP had only gained (revised) 2.3%.

That previous and surprising (to some) low rate had been uniformly blamed on delta COVID disrupting the economy late summer, therefore thought to be nothing more than a temporary well-understood soft patch.

These latest estimates show that real GDP outperformed those expectations by a substantial margin, coming in at 6.7% instead rather than 5.5%. But, as I started already, this does not represent a victory over delta, nor a surrender to omicron at the end of Q4.

On the contrary, it was nearly all inventory. A ton of it, in fact so much all at once it ended up being a record positive change in private inventories matching what the Census data had already indicated.

According to these updated estimates, the change in private inventories went from falling by $60.2 billion in Q3 to adding an enormous $224.7 billion in Q4. By the standard accounting, the change from shrinking during Q3 to record addition in Q4 contributed nearly five full points to the fourth quarter’s 6.7% overall growth rate.

Without all those goods – belying the mainstream interpretation of empty shelves – GDP expansion would’ve been less than 2% for the second quarter in a row. This is the persistent theme throughout the data. In fact, Real Final Sales of Domestic Product (above) records just how weakened the last half of last year had really been.

So, while consumer spending has been unusually high on goods, it hasn’t accelerated at all since around June or July (recurring global theme). If anything, the rate of goods spending has outright declined even if from a historic high – just as all those goods ordered when supply and shipping issues had been at the worst finally begin to come tumbling out of the logistical mess.

It can’t be delta or any variant of corona since the lack of spending, despite all that government cash previously, continued all the way across Q4, too.

Overall, spending on services is still behind the prior 2020 peak, meaning there seems to be a limit to how much consumers will fork over even now favoring goods rather than services; though all mainstream attention has been laser-focused on only the one end of it. The goods economy was hyped up artificially and even then it still couldn’t propel total consumer activity beyond its prior baseline.

That’s already a red flag with now two weak quarters in a row.

And those same two weak quarters have extended, importantly, to business investment, as well. Real Private Non-residential Fixed Investment increased only 2.0% Q3 to Q4 (SAAR) after gaining but 1.7% Q2 to Q3. Like the above rates for final sales and those for consumer spending, these are down noticeably from the two quarters to start last year, those specifically filled with federal government stipends.

Without the government at its peak influence, the economy looks quite different.

Outside of inventory, most of which was actually imported, too, the US economy in the second half of the year performed exactly in the way the bond market had been inclined. Growth and inflation expectations in longer-term yields have been waning even as CPI rates accelerated leading to the Fed’s pressure of upcoming rate hikes distorting the short end.

Just since January 4, the spread between the nominal yield for the 10-year Treasury above the nominal yield of the 5-year has dropped by 14 bps from an already-low 29, reaching a new recent low of just 15 today. The 2s10s spread has collapsed by 26 bps in those same sixteen trading sessions, falling to now 63 after today’s close of business.

This “growth scare” is all over these GDP numbers, further supported by the one segment which created the upside surprise in Q4’s headline rate. Such a large dose of unsold inventory, with more on the way, combined with what sure seems to be a clear slowdown across the entire economic landscape (especially as the noise from the government helicopters fades farther and farther into the background) doesn’t bode very well for the near and intermediate terms.

It doesn’t mean recession is just around the corner, rather inflation’s chances have seriously diminished alongside substantially raised downside risks (to some extent) to the overall and global economy.

No wonder the back end of the yield curve has utterly collapse recently. The Fed is increasingly resolute as to its tapering and rate hikes based on the (already shown to be faulty) unemployment rate while inventory and persistent economic weakness of all kinds only further enflames “growth scare.”

A true conflict of interest (rates).