Although the January ADP National Employment Report was better than expected, the fourth quarter GDP report was a disappointment. Although everyone was shocked and disappointed by the fourth quarter GDP report, Wednesday’s good news came in the form of the January ADP National Employment Report .  Economists had been anticipating that ADP would tell us that 172,000 private sector payroll jobs had been added between December and January.  Instead, the figure reported by ADP was 192,000 new jobs.   ADP: January Payrolls Climb the Most in 11 Months From the report: Mark Zandi, chief economist of Moody’s Analytics, said, “The job market is slowly, but steadily, improving. Monthly job gains appear to have accelerated from near 150,000 to closer to 175,000.  Construction is finally kicking into gear and more than offsetting the weakness in manufacturing.  The recent gains may be overstating any improvement, particularly in the context of recent revivals in growth at the start of the past three years, but the gains are encouraging nonetheless.” To everyone’s surprise, the Bureau of Economic Analysis reported that fourth quarter GDP contracted at an annualized rate of 0.1 percent, despite economists’ expectations that GDP increased by 1.1 percent annualized during the fourth quarter of 2012.  It was the first report of quarterly economic contraction since the second quarter of 2009.   GDP Q4 Advance Estimate at -0.1% From the report: Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the Bureau of Economic Analysis.  In the third quarter, real GDP increased 3.1 percent. *    *    * The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, decreased. The “glass half-full” crowd is focusing on this passage from the report: Real personal consumption expenditures increased 2.2 percent in the fourth quarter, compared with an increase of 1.6 percent in the third.  Durable goods increased 13.9 percent, compared with an increase of 8.9 percent.  Nondurable goods increased 0.4 percent, compared with an increase of 1.2 percent.  Services increased 0.9 percent, compared with an increase of 0.6 percent. Real nonresidential fixed investment increased 8.4 percent in the fourth quarter, in contrast to a decrease of 1.8 percent in the third.  Nonresidential structures decreased 1.1 percent; it was unchanged in the third quarter.  Equipment and software increased 12.4 percent in the fourth quarter, in contrast to a decrease of 2.6 percent in the third.  Real residential fixed investment increased 15.3 percent, compared with an increase of 13.5 percent. The following passage from the report demonstrates that if the change in private sector inventories had not been so significant and if government spending had not changed from third quarter, the economists’ expectations would have been right on target: The change in real private inventories subtracted 1.27 percentage points from the fourth-quarter change in real GDP after adding 0.73 percentage point to the third-quarter change.  Private businesses increased inventories $20.0 billion in the fourth quarter, following increases of $60.3 billion in the third and $41.4 billion in the second. Real final sales of domestic product — GDP less change in private inventories — increased 1.1 percent in the fourth quarter, compared with an increase of 2.4 percent in the third. Also on Wednesday, the Federal Reserve’s Federal Open Market Committee (FOMC) concluded its two-day meeting and released its FOMC Statement , based on the decisions made at the meeting.  As the passage below indicates, no changes in policy have been made.  Due to the normal rotation in FOMC membership, Richmond Fed President, Jeffrey Lacker – the sole, dissenting “hawk” on the FOMC – is no longer a sitting member.  Nevertheless, his shoes as dissenter have been filled by Esther George, who replaced Tom Hoenig as the new President of the Kansas City Fed.   GDP Shows Federal Reserve Just Screwing the Average American From the report: To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. *   *   * The Committee will closely monitor incoming information on economic and financial developments in coming months.  If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. *   *   * In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.   The major ETFs expected to respond to fourth quarter GDP report and the January ADP National Employment Report are: Industrial Select Sector SPDR ETF (NYSEARCA:XLI)  -0.91% Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP)  -0.19% Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY)  -0.18% SPDR S&P Retail ETF (NYSEARCA:XRT)  -0.94% iShares Russell 2000 Index ETF (NYSEARCA:IWM)  -1.15%   Learn More About iShares ETFs Bottom line:  Fourth quarter GDP contracted for the first time since the recession as a result of a significant drop in government spending (especially on the military) as well as a drop in private inventory accumulation.  Consumer spending (PCE) actually increased.  Nevertheless, the increase in the payroll tax during 2013 could impact consumer spending during the new year as we may see from the first quarter 2013 GDP report.  The more significant report on payroll expansion will come from the Bureau of Labor Statistics on Friday.    Sign up for Wall Street Sector Selector’s FREE Stock Market Timing Indicator!    Disclaimer: The content included herein is for educational and informational purposes only, and readers agree to Wall Street Sector Selector’s Disclaimer , Terms of Service , and Privacy Policy before accessing or using this or any other publication by Wall Street Sector Selector or Ridgeline Media Group, LLC.