Wednesday, April 29, 2009

GDP worse than expected and the markets LOVE IT!

The markets have taken the surprisingly bad GDP data in stride and are all up over a percent this morning. Here is the logic (or lack of logic) driving the market right now: When a company announces that it lost $5 billion last quarter it might rally because the expectation was for it to lose $5.1 billion. However, when the estimate for GDP contraction was -5% and the actual contraction is -6.1%, it's another cause to rally.

We've had many markets like this in past years - 1999, 2003 - they defy all logic and continue to move higher. Eventually, reality rules the day, but that is not the case today.

Hidden within the GDP data are some SHOCKINGLY bad statistics.

* Real nonresidential fixed investment decreased 37.9 percent in the first quarter
* Nonresidential structures decreased 44.2 percent
* Equipment and software decreased 33.8 percent
* Real exports of goods and services decreased 30.0 percent
* Real imports of goods and services decreased 34.1 percent

These are not the sort of numbers that signal any sort of rapid turn around. Again, here's my thinking we eventually slow our rate of decline in the economy. Things might even improve a little later this year as the stimulus boosts spending, but I think the best case scenario is that we have an L shaped recovery (we just stop contracting and growth doesn't return for many, many years), and the worst case scenario is a the Lightning Bolt Recession -- we fell off a cliff in 2008, we stabilize for a moment at the end of 2009 and go cliff diving again in 2010.

We'll hear from the Federal Reserve later today, but I expect it to be well received whatever they say. Unless, they say something like "Holy ^#!%, we're screwed. We have over a trillion dollars worth of toxic assets on our books." However, I don't think they'll broadcast that too loudly :)

Cheers!

******* Update: The two critical components of the GDP number that were "positive" were a decline in imports (when imports decline, it's a net positive for our GDP) and a 2% increase in consumer spending. I find that 2% number really troubling. Consumers are getting squeezed left and right, 4 million jobs lost in the last 8 months and somehow spending jumped? The banks and retailers seem to have a different view of the consumer that's still sitting on their hands.

I think the government statisticians might be playing fast and loose with their assumptions, but we'll have to wait to look for revisions before we any more info on the consumer spending data.

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