A Bit of Good Economic News

by: Wall Street Strategies

By Carlos Guillen

The U.S. Department of Commerce delivered a bit of good news this Friday, announcing that real GDP growth during the first quarter of 2011 was measured at 1.9% (final reading), which was a bit higher than the prior estimate of 1.8% provided a month ago; moreover, the result was above the Street's estimate of 1.8%. On the downside, we should point out that GDP during the fourth quarter of 2010 registered at 3.1%, so the department's most recent result clearly showed significant deceleration to the GDP trend.

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The small upward revision was the result of a slight increase in net exports, and a larger contribution from the change in private inventories; this was partially offset by a larger decrease in state and local government spending and by a decrease in nonresidential fixed investment.

In general during the first quarter of 2011, GDP was positively affected by personal consumption expenditures (PCE), private inventory investment, exports, and nonresidential fixed investment. These positive contributions were partially offset by negative contributions from federal government spending and state and local government spending, as well as imports.

Another bit of good news was that durable goods orders increased 1.9% in May after dropping 2.7% in April, coming in higher than the Street's estimate of 1.5%. This brought some relief to the market as these durable goods have been a factor in the economic recovery, and there were concerns that there would be weakness as supply chain disruptions, after the March disaster in Japan, had been constraining manufacturing.

We should note that despite this bit of good news, the bulk of the economic data has been pointing to a much slower than expected GDP growth for the rest of the year, and some caution is warranted as the government continues struggle with the budget and the debt ceiling, which puts at risk borrowing costs for capital investments. Moreover, the continuing climb in the price consumer goods is making growth prospect pull back, causing expected GDP levels to sharply decelerate. In fact, on Wednesday the Federal Reserve lowered their full year GDP forecast to the range of 2.7%¨C2.9%, down from its April forecast of 3.1%¨C3.3%. While this is certainly nowhere near a double dip recession, the fact that so many economists have been cutting full year GDP estimates does raise significant caution.