Breaking Views

GDP: Not as dismal as it looks

The slowing decline suggests the economy is nearing a bottom. However it may stay there.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Martin Hutchinson, breakingviews.com

(breakingviews.com) -- The advance report of first quarter U.S. gross domestic product was stronger than it looked.

It declined overall at a 6.1% annual rate, faster than expected. But consumption turned positive and inventories dropped sharply, while weak government spending - which won't be a problem once stimulus dollars start circulating - depressed growth. Capital investment inevitably plummeted. But the figures suggest the economy may be nearing a bottom. Unfortunately, it may also stay there.

The advance estimate is normally substantially revised with new statistics, such as the inclusion of March trade figures, for the release of the "preliminary" estimate in May. Since trade globally rebounded in March, and other economic data has improved somewhat, it's likely that the May figure will be less dire.

The most positive sign for future GDP trajectory was the $104 billion decline in private business inventories, which accounted for 46% of the quarter's GDP decline. Since personal consumption rose, the inventory overhang from previous quarters looks to have been corrected or even over-corrected, so flat or modestly increasing inventories should in future quarters boost reported GDP growth.

Capital investment plummeted by over 10% - a 38% annual rate - mostly due to the housing decline and the financial crisis. In recent weeks, financing spreads have eased and housing has shown signs of improvement, suggesting even this factor may bottom out soon.

Surprisingly, government spending declined in the quarter, a drop that accounted for 13% of GDP's overall fall. This was presumably due to the change in administrations, and state and local belt-tightening efforts. Given the $779 billion stimulus package, that should now reverse sharply.

The rate of economic decline was significantly lower than in the fourth quarter. However, a rapid recovery seems unlikely. The GDP deflator rose by 2.9%, indicating that inflation remains a threat.

A resurgence would cause interest rates to rise, while there may also be "crowding out" of private capital investment from the unprecedented budget deficits. Combined, this would indefinitely delay true economic recovery. To top of page

Company Price Change % Change
Bank of America Corp... 16.09 0.08 0.50%
Apple Inc 102.50 0.25 0.24%
Intel Corp 34.92 0.27 0.78%
Facebook Inc 74.82 0.96 1.31%
General Electric Co 25.98 -0.03 -0.12%
Data as of Aug 29
Index Last Change % Change
Dow 17,098.45 18.88 0.11%
Nasdaq 4,580.27 22.58 0.50%
S&P 500 2,003.37 6.63 0.33%
Treasuries 2.34 0.01 0.39%
Data as of 8:01pm ET
More Galleries
8 must-have travel apps Whether you've got wanderlust or an airline grievance, here are some apps to pack onto your phone. More
Hot stocks: 10 record breaking companies The S&P 500 is trading at all-time highs, and many well-known businesses are leading the charge. Time to buy or sell? More
My biggest retirement mistake Five CNNMoney readers share stories about saving that you can learn from. What they would do differently if they had another chance. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.