GDP growth likely quickened in final quarter

REUTERS FORECASTS:

The median forecast is for fourth quarter gross domestic product to quicken to an annual rate of 4.6 percent from 2.2 percent in the third quarter. Forecasts range from a growth pace of 3.5 to 7.5 percent.

The median forecast for final sales of domestic product -- GDP minus change in private inventories -- is for a rise to 1.6 percent from a 1.5 percent increase in the third quarter.

FACTORS TO WATCH:

Economic growth in the fourth quarter likely accelerated to an annual rate of 4.6 percent, the fastest pace in nearly four years, boosted by a dramatic swing in inventories. Businesses have in previous quarters aggressively slashed stocks of unsold goods to cope with weak domestic demand, weighing down sharply on GDP.

The pace of inventory liquidation slowed in the third quarter and contributed to the first economic expansion since the second quarter of 2008. Analysts believe businesses cut inventories at a much slower pace or even started rebuilding their stock in the fourth quarter, which should hugely benefit growth during the period.

Given that the growth pace will be largely driven by the inventory cycle, it is likely to mask the fragile nature of the economy's recovery from the worst downturn since the 1930s.

Final sales of domestic product, which exclude inventories, are expected to rise less strongly. Final sales are a good indicator of future GDP growth trends.

Consumer spending is expected to have shown some resilience in the fourth quarter, despite the highest unemployment rate in just over a quarter century. Export growth also likely supported the economy in the fourth quarter. New home building probably added to growth in the fourth quarter, but not on the same scale as in the prior quarter.

Decreasing spending on commercial property could see business investment being a drag again on growth.

MARKET IMPACT:

A stronger than expected fourth-quarter GDP reading would normally tend to hurt Treasuries prices while a weaker than forecast reading could typically lift them. However, if GDP looks robust due to inventories, the Treasury market may quickly put the strong reading behind it as it anticipates much weaker growth in the first quarter of 2010.

U.S. stocks and the dollar will likely climb on a better than expected reading and fall if weaker than Wall Street forecasts. Recently the dollar has both strengthened and weakened on strong U.S. economic data, but given the importance of GDP readings when determining economic health, a strong reading is seen boosting the greenback. (Reporting by Lucia Mutikani, additional reporting by Ellen Freilich; Editing by Chizu Nomiyama)