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Why the Poor Q1 GDP is No Big Deal

| June 04, 2014
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Economists aren’t alarmed. Investors shouldn’t be either.

Provided by Andrei Jigalin, CFP®

 Blame it on winter, not the consumer. The second estimate of first-quarter growth arrived on May 29, and according to the Bureau of Economic Analysis there was no growth at all. For the first quarter in three years, the economy contracted: U.S. real Gross Domestic Product (GDP) was revised down to -1.0%. Wall Street shrugged when it heard the news, and the S&P 500 actually gained 0.54% on the day. Why were economists largely unruffled?

You can chalk up the contraction to three factors. Declining exports, private-sector investment and business inventory greatly influenced the poor GDP reading. Exports were down 6.0% in Q1 and private investment and wholesale stockpiles both dipped approximately 1.6%.

A silver lining is easily noticed. Commerce Department data shows the annualized rate of personal spending rising 3.1% during Q1, even with brick-and-mortar shopping hindered by a bone-chilling winter. Many economists believe that Q2 GDP will be resoundingly positive, with growth between 3.5% and 4.0%. In fact, some see 3% growth or better for the rest of 2014.

Many indicators have improved recently. Besides consumer spending, you had the best month for hiring in two years in May (288,000 net new jobs). Initial jobless claims were near a 7-year low last week according to the Labor Department. The Institute for Supply Management has recorded expansion in the U.S. manufacturing sector for 11 straight months.

Has the housing market stalled? Not quite. National Association of Realtors data had existing home sales up 1.3% in April, and pending home sales have increased for two months.

Some impediments are absent. We won’t see a fight over the debt ceiling this year. The tax hikes and sequester cuts of 2013 aren’t being replicated. This bodes well for quarters to come.

Remember, quarterly GDP is estimated three times. The final number can be notably different from the initial one, and the Bureau of Economic Analysis (BEA) still has one last appraisal to make for Q1. No matter what the final Q1 number is, key gauges point to present and near-term economic growth.     

Andrei Jigalin may be reached at 415-506-4569 or [email protected]

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