GDP Report: Another Painful Quarter

The government's advance estimate of GDP for the first quarter was worse than expected—quite a bit worse. The consensus outlook called for a 4.7% drop, according to Briefing.com, but the government says the decline was -6.1%.

The good news is that GDP reports are old news, and so today's dire numbers have already been digested in various reports in past weeks and months. But there's always the future, and it's debatable how much has changed in April, or is set to change in May.

Meanwhile, it's clear that the U.S. economy's performance for January through March was quite grim. The 6.1% drop in real annualized GDP for Q1 was just below the 6.3% fall for 2008 Q4. Both numbers are among the steepest quarterly declines in 50 years. The fact that the two came back to back only makes matters worse. The question is what's in store for Q2?

There's reason for modest optimism. One reason is that consumer spending actually rose in Q1, with the economically sensitive durable goods sector showing especially robust performance. That's a sharp turnaround from the sharp declines in last year's second half, when Joe Sixpack all but abandoned discretionary spending habits. But virtually everything else for this year's Q1 tally lost ground, which is to say that private investment and exports gave way in this year's first three months.

If you're feeling hopeful, you might take solace from the improving readings of consumer sentiment and use that as a basis to predict that Q2 will show continued growth in consumer purchases. The Conference Board yesterday reported that its widely monitored Consumer Confidence Index soared in April. Lynn Franco, director of The Conference Board Consumer Research Center, said in a press release that accompanied yesterday's announcement:

"Consumer Confidence rose in April to its highest reading in 2009, driven primarily by a significant improvement in the short-term outlook. The Present Situation Index posted a moderate gain, a sign that conditions have not deteriorated further, and may even moderately improve, in the second quarter. The sharp increase in the Expectations Index suggests that consumers believe the economy is nearing a bottom, however, this Index still remains well below levels associated with strong economic growth."

The notion that the consumer is prepared to start spending consistently, much less abundantly still looks hasty. The rebound in consumption in the first quarter appears like a reaction to the dramatic declines of late-2008. And if you look at retail sales so far this year, the trend suggests that consumers are increasingly cautious. Indeed, the robust gain in January virtually evaporated in February and turned into an outright decline for March, the Census Bureau reports. Perhaps April will break the trend.

One obstacle that's not quickly resolved is that there's still lots of debt to work off and it weighs heavily on household balance sheets. Adding to this negative pressure is the ongoing decline in home prices, based on the latest reading of the S&P/Shiller-Case Index. The rate of decline is slowing, but it's not yet clear that a bottom is imminent for real estate.

On the positive side, one can argue that the corrections that have roiled virtually every corner of the economy will soon lead to something less painful. Recessions don't last forever, even deep, global ones. But what's not yet widely understood by the crowd is that the end of the recession isn't likely to lead to a new era of growth any time soon. Meanwhile, the jury's still out on whether the worst of the economic contraction has even passed.

There are still many mountains to climb, but for the moment we're still just a few steps above the valley's lowest point.

Comments

[Hal.P.]

It is good to see that the markets today are shrugging this news off. But as someone closer to main street then wall street I am left shaking my head. I and a good many of my compatriots are taking a good deal of our earnings and applying that to debt (mainly credit card) and savings. We don't quite see it as being out of the woods yet and I think there is an overall feel that another shoe is about to drop (credit cards and commercial mortgages).

I'm looking at widget ExactPrice right now and the fact that gold and silver remain fairly high tells me that others are still feeling a bit of wariness.

2009 Apr 29 10:52 AM

[Lilguy]

OK, so much for the largely intuitive and illusory "reasons for optimism." How about the reasons--facts and forecasts--for pessimism? Apparently, there is just one obstacle--debt--according to Mr. Picerno.

Presenting one side of the story, whether good or bad, provides no useful guidance on what to expect for the future. In fact, the failure of economists to grasp reality for the last quarter as they gave way to "reasons for optimism" shows why this kind of happy talk should be disregarded.

Mr. Picerno can and has done much better than this.

2009 Apr 29 11:45 AM

[Economic Philosopher]

If you look at the numbers more closely, you'll see that a big percentage of durable goods was "motor vehicles and parts (20.5%)," which has been negative for 6 quarters (seven if you include the small increase of 1.6% in 2007 II). When you don't spend money on your car for two years eventually you have to.

In addition, the other large percentage gains (20.5 % and 6.4%) came from "electricity and gas" and "Gasoline, fuel oil, and other energy goods."

While other consumer spending categories were up fractionally, which may seem hopeful, it seems that real consumer spending was driven by people's cars breaking down and rising energy costs.

2009 Apr 29 01:44 PM

[Moon Kil Woong]

Previous seeking Alpha user have shown that consumer sentiment often closely tracks the stock market and may not really be indicitive of future performance or even real consumer purchasing resolve. I would look at this number as one of the least important rather than most important future economic indicators.

It makes a good talking piece and a good excuse for market movements. That's about all.

2009 Apr 29 01:57 PM

[Hot Richard]

I only wish the government had stimulated by $2 trillion...no...wait..... trillion! Imagine the utopia we'd have!

Don't worry, eventually GDP will stop falling.

2009 Apr 29 02:14 PM

[mac123449]

And death will walk the earth. passage from revelations bible. well we have a pandemic starting i'm begining to think more and more this is end times we have global warming, new Depression, and now a pandemic the only way it could get worse is if god comes down and starts killing everyone fighting with the devil.

2009 Apr 29 04:40 PM

[No Free Cake]

It's puzzling ... the GDP report says consumer spending rose in the quarter. Yet, States are reporting significant drops in sales tax revenues. So, how are people buying these durable goods without paying taxes?

For a sales tax report, see:
www.reuters.com/articl...

2009 Apr 29 11:29 PM

[frosty]

Isn't the data seasonally adjusted and aren't the seasonals out of whack because of the perturbances in the global economy? Have any fellow bloggers or the author looked at this?

2009 Apr 30 08:23 AM