Wednesday, April 30, 2008


First quarter GDP came out today and showed the economy grew at a whopping .60% rate, the same as last quarter and the slowest pace since the fourth quarter of 2002. It's difficult to know what to do with these releases since they come from the biased government and are often significantly revised well after the fact. However, the market pays attention to it, so we have to pay attention to it. It's a silly game. We all know the figures are manipulated and heavily revised, but since we think others are trading on the data, we'd better too! Game theory run amok.

The bulls will take some solace in the "fact" that we haven't seen the two consecutive quarters of negative GDP growth that some still look for to define a recession. Either way, it's clear that the economy has at least stalled out over the past 6 months.

Keep in mind that real GDP takes out the effect of inflation, so the lower the government's estimate of inflation, the better the real GDP looks. For the first quarter, inflation was estimated to be running at a 3.5% pace. Had that estimate come in a little higher, real GDP would have been negative. Given the government's use of hedonic pricing and rent-equivalency for estimating housing inflation/deflation, they can pretty much manufacture whatever number they want.

More striking is the fact that all of the GDP growth last quarter can be attributed to an increase in inventory. GDP measures the value of that inventory even though an increase in inventory means more product is sitting on shelves and may prove to be a drag in future quarters. If you take out the change in inventory, you're left with what's called final sales. This is a purer measure of what actually happened in the quarter. This figure fell .20% last quarter. This is only the fourth time this decade that this figure fell below zero.

As for other contributors, it's no surprise that net exports helped boost GDP for the fourth straight quarter as the dollar has been declining. Personal consumption registered its slowest growth rate since the second quarter of 2001. Residential investment once again took a good chunk (-1.23%) out of GDP.

All in all, this isn't a particularly cheery report. For the balance of the year, consumption and investment are likely to remain weak while net exports and government spending add some support. I imagine the bulls and the press will make a fuss over the fact that GDP came in positive, but I doubt this report will have much of an impact on the Fed's interest rate decision this afternoon.