• Recent data revisions reveal labor markets have been stronger than originally thought, though overall employment picture is mixed

• The first estimate of Q4 GDP came in at a very weak -0.1%, but the overall data does not look recessionary

• Real underlying growth rate looks to be about 1.5%, spot on the year-over-year trend and solidly in the middle of our expected range of 1%-2%growth for this year.

Encouraging news from the Bureau of Labor Statistics (BLS) Establishment Survey: benchmark revisions have painted a better picture of job growth in recent months and in the past two years than was originally thought. Indeed, job growth in 2012 was revised higher by 335k showing full-year gains of 2.17 million. The strongest gains came from retail, construction (finally) and healthcare. Temporary hiring contracted, and manufacturing remained weak, still feeling the effects of the global slowdown. Overall, it appears labor markets have been stronger than originally thought, and it is noteworthy that businesses were confident enough to still expand their workforces despite uncertainty around the fiscal cliff.

The BLS Household Survey also saw benchmark revisions. However, results were less stellar and showed that the January unemployment rate ticked up slightly to 7.9% from 7.8% in December. The labor underutilization rate held steady at an elevated 14.4%, while the participation rate and the employment to population ratio were basically unchanged and still quite depressed. Aggregate weekly payrolls are up a solid 3.8% year-over-year. This indicates respectable gains but doesn’t include the coming drag from increasing payroll taxes. Fiscal austerity has just started to kick in and will be a considerable headwind to growth and prove an obvious constraint on consumer spending.

The best news, I thought, was the continued fall in long-term unemployment. Declines here are falling faster than overall unemployment, and this now accounts for just 38.2% of overall unemployment. Further, the median duration of unemployment is now just 16 weeks. Both measures are the lowest since the recession ended.

The first estimate of Q4 GDP came in at a very weak -0.1%, but the overall data does not look recessionary. While the headline print was bad, the internals were not. Starting with the good news:

• Consumer spending looks steady with personal consumption expenditures advancing at 2.2%.
• Housing is a key support with residential investment up 15% and capital spending up 12%. These are the most cyclical segments and reflect the ongoing support from the still recovering economy.

The less-than-good news came from declines in government spending and a sizable falloff in inventory accumulation.

• Government outlays declined as defense spending fell 22% (the largest drop since 1972 when the Vietnam War ended). Some was payback from sharp increases seen in Q3 from the front loading of defense spending ahead of the sequester. But weaker federal outlays will be a lingering constraint on growth.
• Inventories were allowed to run off after building in Q2 and Q3 (the biggest slowdown since 2009). Each subtracted 1.3% from GDP, an unusually large drag.
• Personal income in Q4 jumped 8% mainly on the boost from extraordinary dividend payments ahead of tax changes. Income gains will reverse in Q1 and the hit from higher payroll taxes threatens.

Because of these swing factors, it is probably a good idea to average the strength in Q3 GDP (at 3.1%) against the weakness in Q4 to gauge the real underlying growth rate. This looks to be about 1.5%, spot on the year-over-year trend and solidly in the middle of our expected range of 1%-2%growth for this year.

Some things to keep in mind: Housing remains an important stabilizer. Household and business sector demand was resilient in the face of uncertainty. Coming tax increases will bite into consumer wallets in the first half. Other fiscal policy risks are still on the horizon (sequestration) with the potential to squeeze growth further.

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