Friday, April 27, 2012

GDP Print Disappoints

[click to enlarge]

Examine the colors in the chart above [courtesy of ZeroHedge], particularly the bar on the far right, representing the components of GDP growth in the U.S. economy during the January-through-March quarter.  That is not a palette with which perma-bulls like to paint.  They comprise a school of artists preferring lots of red above the dashed zero line, with smaller splashes of green below that line.  Fixed investment (red) portends future production.  Unsold inventories (green), on the other hand, signal a digestive slowing in production.

Stock market investors started to get excited after last year's Q3 numbers were released--red above, green below.  Share prices went on a four-month tear with hardly a pause.  During the past few weeks, though, volatility has returned as equities have suffered from indigestion.  Now we know why.  The Commerce Department released a preliminary estimate this morning that Q1 GDP grew by 2.2%, failing to match the prior quarter's +3%.  Real final sales rose just 1.6%.  The slowdown came despite the early spring weather, which jump-started home construction and consumer spending (check out the dark blue).

The consumer piece may not be sustainable.  We know that consumer expenditures are outstripping personal disposable incomes, and that cannot last.  Much of the "buying" in the first quarter was actually vendor financing in disguise.  Automobiles drove off dealer lots, adding to GDP, but the subprime lending used to move inventory is not the same as cash-for-chrome.

The primary area of concern is the thin red line in the new bar.  Look left to see the last time we had one of those, one year ago.  The following quarter (Q2 2011) saw just 1.3% growth in GDP.  Estimates for the current quarter (ending June 30) will be coming down after today's release.

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