GDP Report: Another Painful Quarter

by: James Picerno

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.