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... 16.89 -0.52 -2.99%
Apple Inc 124.53 -2.22 -1.75%
Micron Technology In... 18.73 -0.93 -4.73%
Ford Motor Co 15.02 -0.38 -2.47%
Facebook Inc 85.80 -2.18 -2.48%
Data as of Jun 29
Index Last Change % Change
Dow 17,596.35 -350.33 -1.95%
Nasdaq 4,958.47 -122.04 -2.40%
S&P 500 2,057.64 -43.85 -2.09%
Treasuries 2.33 -0.15 -5.86%
Data as of 1:43am ET
More Galleries
8 great convertibles for summer Slap on some sunscreen and hit the open road in one of these fun open-top cars. More
Corporate America celebrates gay marriage decision Big business took to Twitter to celebrate Friday's historic Supreme Court decision. More
Vacation experiences of a lifetime From spending months at sea cruising across the world to stepping right up to sea lions in their natural habitat, luxury travel network Virtuoso surveyed nearly 6,000 people from 60 countries to find out which vacation destinations top their lifelong bucket lists. More
Sponsors
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