Today’s Headlines: First Quarterly GDP Drop in 3 Years

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Today’s Headlines: First Quarterly GDP Drop in 3 Years
June 3, 2017

First Quarterly GDP Decline in 3 Years!

The U.S. Commerce Department released the latest report on Q1 2014 GDP on Thursday, May 29, with surprising results. While economists had been expecting a downward revision, the magnitude caught many off-guard. Q1 GDP was revised from the initial anemic growth rate of 0.1% to a 1.0% drop – the first time in three years that GDP has contracted.

Far from causing concern, many economists brushed off this number as if it were a refreshing spring rain, with sunny skies soon to follow.

Singin' In the Rain

The drop was primarily attributed to four factors – extreme winter weather, a decline in inventories, a decrease in exports and less government spending. Aside from that, say economists, things are going great… or will be soon.

Stuart Hoffman, Chief Economist at PNC, attributes the majority of the drop to the weather (as do many others) and likens the effect to a spring coiled for a "sharp snap-back." Jim O'Sullivan of High Frequency Economics reminds us that quarterly GDP data is volatile, and that an increase in hiring and lowering unemployment claims should drive a future increase in business expansion. Doug Handler of IHS Global Insight says, "…the nature of the revisions helps build the economic case for much stronger growth in the second quarter and through the remainder of the year."

So the economic summary is, "Gray skies are gonna clear up, put on a happy face."

Musicals aside, there is some reason to believe this. Q1 GDP numbers are often lower with rebounds to follow in Q2, inventories do typically rebound, bad winter weather does typically shift GDP downward, and dependence on monthly numbers can be misleading.

It is also true that some indicators are looking up in the broader scale. Non-farm payrolls are slowly expanding (over 190,000/month in Q1), initial jobless claims are continuing to drop (down to 300,000 from 327,000), and manufacturing is improving – for example, the Chicago PMI index from Friday indicates significant gains for new orders and backorders.

However, bears can counter with a sputtering housing market, employment that is still overall relatively weak (with many having left the workforce entirely), and stagnant wages.

Who's Driving the Economic Bus?

One of the other optimistic signs was increased consumer spending, which was up by 3.1% for Q1, and would logically drive manufacturing and the need to expand beyond refilling inventories. This positive trend was interrupted during April, when spending dipped 0.1% (according to the Commerce Department), but rebounded smartly in May when consumer spending reached a six-year high (according to Gallup)!

One hopes that consumer spending maintains a strong pace. After all, businesses are not going to fully refill the shelves unless they expect somebody will buy their goods. The recent durable goods report surprised analysts by continuing an increasing upward trend, suggesting that consumers may indeed drive the economic bus forward.

How long can they hold onto the wheel? At some point, businesses are going to invest and unleash their cash reserves, (presumably) creating jobs and eventually driving up wages. Hopefully, the combination of higher wages and looser credit can kick-start the housing market, further propelling the economy.

The pessimist will say that consumer spending cannot be sustained long enough for wages to rise and more jobs to be created. The optimist disagrees, and suggests even if consumer spending falters, that spending from other directions (government or exports, for example) will help to fill any gap. Maybe health care spending will do it….

The Takeaway

While frequently gyrating monthly numbers can send analysts off into the weeds, on the whole, the optimism for the economy appears to be warranted. Whether or not it is as strong as anticipated, growth appears to be on the horizon.

Let's hope that the bulls are right and the economy is poised for a significant rebound. If you are in the lower strata of the economy, you are probably getting tired of being rained on and are done singing about it.

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