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1st Quarter GDP is Not a V-Shape

Posted by Larry Doyle on April 30, 2010 9:14 AM |

The 1st quarter GDP figures were just released and registered a 3.2% gain. This statistic is slightly weaker than consensus expectations of 3.4%. What were the components? The Bureau of Economic Analysis provides insights:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.2 percent in the first quarter of 2010, (that is, from the fourth quarter to the first quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 5.6 percent.

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, and nonresidential fixed investment that were partly offset by decreases in state and local government spending and in residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The key question with any GDP report is whether positive growth is sustainable. That sustainability is ultimately a function of real final purchases and not inventory buildup. Just as 4th quarter GDP had a significant inventory build factor (3.8% of the final 5.6% growth), this 1st quarter report does as well. How big a factor? The BEA highlights that:

The change in real private inventories added 1.57 percentage points to the first-quarter change in real GDP after adding 3.79 percentage points to the fourth-quarter change.

Real final sales of domestic product — GDP less change in private inventories — increased 1.6 percent in the first quarter, compared with an increase of 1.7 percent in the fourth.

No pom-poms here. Those 1.6 and 1.7% figures are the equivalent of walking pneumonia for our economy. While the on the surface report is somewhat weaker than the consensus, it is stronger than that predicted by Rick Davis of Consumer Metrics Institute. Rick had predicted a 2.5% reading. Be mindful that Rick is already projecting 2nd quarter GDP of -1.5%!!!

I will be interviewing Rick for the second time this Sunday evening from 8-9pm ET on No Quarter Radio’s Sense on Cents with Larry Doyle. For more on Rick’s thoughtful analysis, let’s review my initial conversation from late March.

On March 27th, I interviewed Rick Davis of Consumer Metrics Institute, which tracks consumer activity on a real-time basis. Based on Rick’s analysis which has a 17-week lead time, Rick predicted 1st quarter GDP would come in at 2.5%. Rick’s projection, which he drew from data analyzed in the 4th quarter 2009, is decidedly weaker than the consensus expectation of 3.4%. Keep in mind that GDP is subject to multiple revisions.

My conversation with Rick went as follows:

Please allow me to provide my own edited version of this segment, in which I am discussing with Richard how government analysts and economic academicians have problems in sourcing and studying data to project GDP.

RD: There’s a problem with the lag in getting the info. The second problem they have, they’re looking at production (LD’s edit: as opposed to the CMI’s focus on real-time consumption) which is way downstream. We think what’s happening in the economy isn’t necessarily what’s happening at factories.

LD: So, you’re way upstream with the consumer?

RD: We’re way upstream with the consumer. It’s going to take some time for the impact of the consumer to flow downstream to production.

LD: In layman’s terms, what you just told me is you’re ahead of the curve or you’re ahead of the academicians or the government analysts in measuring GDP.

RD: Yes. Just by virtue of where we’re sampling. We’re sampling upstream and we’re getting daily data. It takes us two days to authenticate and validate, not a month, and we’re measuring on a daily basis.

LD: Could I be so abrupt and ask you what 1st quarter GDP is going to be?

RD: 1st quarter GDP, we would guess, is going to be about 2.5%. The reason I say that is that’s where our numbers were 17 weeks earlier. What we notice is that our Daily Growth Index, as we call it, leads the GDP at least over the last 6 quarters by about 17 weeks.

LD: Wow!! That right there is an unbelievable statistic. I mean 17 weeks, heck, that’s more than a quarter itself.

RD: Yes, yes it is. In fact, the 1st quarter GDP will approximate where our numbers were at the end of November.

Market reactions have turned slightly negative on this report. In my opinion, this 1st quarter GDP report is certainly far from anything that would be defined as a V-shaped recovery.


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