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REVISED GDP BARELY POSITIVE, REVERSING INITIAL DROP By Mark Lieberman, Economist for the Five Star Institute Real gross domestic product (GDP) grew 0.1 percent in the fourth quarter as the economy increased at a 0.1 percent seasonally adjusted annualized rate, according to the Bureau of Economic Analysis (BEA). In January in an earlier GDP release, BEA reported the nation's economy contracted by 0.1 percent, the first "negative growth" since the end of the Great Recession in mid-2009. Economists expected the turnaround with the revised report, but with a stronger 0.5 percent growth rate. In reporting the revised GDP, BEA said it was based on more complete source data than were available for the "advance" estimate issued during the first month of the year. "The upward revision to the percent change in real GDP is smaller than the average revision from the advance to second estimate of 0.5 percentage point," BEA said. "While today's release has revised the direction of change in real GDP, the general picture of the economy for the fourth quarter remains largely the same as what was presented last month." Net exports, a subtraction from GDP, were less negative than in the initial report. However, inventory growth was revised down notably. Government purchases also were reduced in the revision. The drop in government purchases followed a third-quarter spike to spend before the end of the government's fiscal year in September. Headline inflation for the GDP price index showed a 0.9 percent annualized inflation rate compared with the initial estimate of 0.6 percent and 2.7 percent in the third quarter. Excluding food and energy, inflation was revised to 1.2 percent, compared with the advance estimate of 1.1 percent and 1.3 percent in the third quarter. Just as timing affected third-quarter government spending, inventory investment was held back even more than originally believed, likely due to hesitation by businesses about fiscal cliff issues. That suggests an inventory rebuild in the first half of this year, adding to overall economic growth. At the same time, weaker retail sales forecasts as a 38 result of the end of the payroll tax holiday could cut into inventory investment. The increase in real GDP in the fourth quarter came from positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from private inventory investment, federal government spending, exports, and state and local government spending. Real personal consumption expenditures increased 2.1 percent in the fourth quarter, down from the originally reported growth of 2.2 percent, compared with an increase of 1.6 percent in the third. Real nonresidential fixed investment increased 9.7 percent in the fourth quarter, in contrast to a decrease of 1.8 percent in the third. Nonresidential structures increased 5.8 percent, unchanged from the third quarter. Real residential fixed investment increased 17.5 percent in the revised fourth-quarter report, compared with an increase of 13.5 percent in the third quarter. By the numbers, GDP grew $4.3 billion in the fourth quarter to $13.66 trillion. Personal consumption grew $49.9 billion and accounted for 70.8 percent of total GDP, up slightly from 70.5 percent in the third quarter. Residential fixed investment in the fourth quarter initially reported at $384.3 billion was revised up to $386.1. It was $370.9 in the third quarter. Residential fixed investment represented 2.8 percent of total GDP in the fourth quarter, up from 2.7 percent in the third quarter. With the revisions, government spending dropped $44.2 billion in the fourth quarter, more than the first reported $41.5 billion. Federal spending fell $40.9 billion, net of a drop of $42.1 billion in defense spending from the third quarter. At the same time though, state and local spending dropped $4.7 billion, compared with the $2.5 billion decline in the first report. Government spending represented 18 percent of GDP in the fourth quarter, down from 18.3 percent in the third. REPORT: REFI BOOM NOT OVER YET, MORTGAGE BANKING TO STAY PROFITABLE A new report from FBR Capital Markets asserts low rates and high demand will continue to boost profitability in the mortgage banking sector in 2013. In a research report, FBR notes that average rates on outstanding mortgages hover between 4.5 percent and 5 percent—well above today's historically low rates. According to the firm, this means there is a "large portion of loans with an economic incentive to refinance." While some may point to recent drops in the Mortgage Bankers Association's (MBA) Refinance Index as proof the refinance boom is coming to a close, FBR says otherwise. "Instead, we argue that there are likely $1 trillion of refinances in an estimated $1.7 trillion to $2 trillion overall market this year, and we predict a corresponding bounce in the MBA index," the report reads. "Additionally, assuming rates remain around current levels, we believe that purchase volumes should rise, offsetting any weakness in the refi index," Fitch's report continued. FBR estimates there are between $2 trillion and $2.5 trillion in mortgages left to refinance, while current refinance capacity stands at $1.2 trillion to $1.3 trillion, leaving the market constrained. As such, rates would have to move 75 basis points or more to have a significant impact on mortgage banking profitability. Additionally, FBR expects that despite increased origination capabilities at big players such as Bank of America and smaller firms such as Nationstar, Flagstar, and PHH Corporation, "capacity will remain constrained as larger originators, like Wells Fargo, slowly decrease their market share." "Accounting for market share gains almost across the board for smaller players, we estimate that the incremental capacity coming into the market will only make up for what Wells Fargo (and other large originators) is shedding," the report says. Given "robust purchase volumes, the pipeline of possible refinancings, and limited market capacity," FBR expects gain-on-sale margins will remain elevated through this year, supporting ongoing profitability going forward. While there is the risk that dramatic increases in interest rates could crash gainon-sale margins and origination volumes, the investment bank considers the probability of such an event to be "largely unlikely given today's lackluster economic environment" and therefore did not factor the possibility into its models.

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