Why the Market Ignored Bad GDP Numbers

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So the second estimate on first quarter GDP was reported today – down 1 percent instead of up 0.1 percent. This was the first decline since 2011. Does that mean we’re headed for recession? The financial press has defined a recession as two negative quarters in real GDP so not only is it too early to declare this a trend but, if you read between the lines of the report, many of the details were actually favorable towards future growth, which is also the likely reason for why the market didn't react to the negative number.

The consensus view is that the drop in GDP in the first quarter was a blip due to weather and inventory accumulation in the third and fourth quarter of 2013 that needed to be worked off. Most of the drop in the revision was a result of inventories, which took off 1.6 percentage points from GDP compared with 0.6 percentage points in the first estimate. The greater drop in inventories allows for a bigger build in the quarters to follow and is causing most economists to increase their estimates for Q2, which investors like to hear. The same thing happened last year after the 12Q4 decline in inventories.

influence inventories
Source: PFS Group, Bureau of Economic Analysis

Besides the traditional definition of a recession, the National Bureau of Economic Research (NBER) likes to use a second qualifying indicator: real Gross Domestic Income (GDI) declines. If the first quarter was just a blip, we should see incomes increase again in real terms and consumer spending should bounce back as well in the quarter ahead. Another encouraging sign is that despite the drop in GDI, consumption – as a component of GDP – continued to expand in the quarter, up 2.09 percent.

real gdp april
Source: PFS Group, Bureau of Economic Analysis

Other components of GDP that were a drag first quarter were corporate profits — down 9.8% after being up 2.2% in Q4 of last year. Most of the decline was a result of domestic industries, which again points towards weather issues here in the US.

Economists and the Federal Reserve policymakers continue to believe this was just a frozen pocket in the expansion:

  • Bank of America revised 2Q GDP growth to 3.8% from tracking as low as 3.2% based on recent data today
  • JP Morgan feels more comfortable about Q2 GDP prospects — penciled in at 3.0%

“Growth in economic activity paused in the first quarter as a whole, but that activity stepped up late in the quarter; this pattern reflected, in part, the temporary effects of the unusually cold and snowy weather earlier in the quarter and the unwinding of those effects later in the quarter.” - April Fed Minutes.

The weekly leading economic indicators continue to point towards growth as I shared last week and so have the economic releases in April and May, overall. I pointed towards many of these in my quarterly webinar. I thought I would update some of the charts that were given in the presentation that clearly show this turn is occurring as we speak, especially in the Citigroup Economic Surprise Index.

citi 29 may
Most of our surveys are in positive territory and expanding.


If you didn’t get a chance to view the webinar yet, please take a look at the video below. If the video doesn't play, you can visit the video here. The webinar discussed many of the important topics in the first quarter (valuations, winteromics, and interest rates) and my analysis on each. The presentation was released on May 6 to clients and May 23rd to the public.

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About Ryan Puplava CMT