Gross domestic product is the measure of the overall size of a country’s economy. The Department of Commerce announced last week that the U.S. GDP fell by 1.0 percent in the first quarter. Does this mean we’re headed for a recession? No. This is one data point, and that doesn’t make a trend. Context is what you need to be looking at to understand the statistic.
First off, the 1.0 percent figure is a revision. Commerce usually gives the markets a number for GDP that is an approximation, and when more data comes in, that number gets revised. The original figure was a drop of 0.1 percent, a big difference. At the same time, Wall Street analysts agreed that the initial figure was too optimistic — the consensus was for a drop of 0.5 percent. So, when it came out at twice that, traders sold.
Notice that I said traders, not investors. A trader will buy and sell a stock, a bond or a contract with every intention of making a quick buck and getting out of the position as fast as possible. And if you have access to all the necessary information in real time, access to efficient order filling and lots of time, there’s nothing wrong with being a trader. Most of us, though, lack one or more of those.
Investors will buy the same instrument a trader will, but the time horizon isn’t hours or days, it’s months or years. Where the trader is concerned about what the closing price will be today, an investor is looking at what the trend over the next several months is. So, to a trader, a bad GDP number is grounds to sell. To an investor, it requires extra analysis.
We had a shrinking economy back in 2008-09. Lehman Brothers went broke, the government had to bail out some banks and American International Group (AIG), a major insurer. Jobs were vanishing at the rate of hundreds of thousands a month. When a bad GDP number came out, it was confirmation that things were going from bad to worse.
That’s not the case with this GDP number. Yes, the economy shrank, but we had a really bad winter. Demand didn’t dry up, people just couldn’t get to the mall. Finance companies hadn’t stopped making car loans or home loans, but people weren’t about to buy a car or a house with two feet of snow on the ground. We weren’t losing jobs, people couldn’t make it out of their homes to get to the interview.
What really happened was a drop in inventory investment, replacing goods sold in a company’s warehouse. The Department of Commerce report says that if you ignore that, the economy actually grew 0.6 percent.
Look at April’s job report. The U.S. created 288,000 new jobs, against estimates of 210,000. Numbers for February and March were revised up by 36,000 jobs total. And it wouldn’t surprise me if the May figures that are due out Friday, June 6, show another healthy result.
The Federal Reserve, which handles America’s money supply, said “growth in economic activity has picked up recently.” The Fed is actually pumping money into the economy, and the big debate in the markets is when that will taper off. Whenever the taper happens, it will be a sign that the economy is healthy enough to make due with less help from the Fed.
Nobody was thrilled with the 1.0 percent drop, but taken in context, it was an aberration brought on by one of the worst winters on record. The clouds have now parted, and we’re back on track.