1Q07 GDP Data Shows Current Rally Rooted in Optimism, Not Profits

 |  Includes: AGG, DIA, SPY
by: William Trent, CFA

According to the Bureau of Economic Analysis:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 0.7 percent in the first quarter of 2007, according to final estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.5 percent.

This “final” release of Q1 economic data (it will still have future benchmark revisions) is more or less in line with the prior estimate, and at any rate the subsequent quarter is nearing its end - making the data relatively stale. But the trend, shown in our chart as the year/year change in GDP (bars) and the year/year change in spending for business equipment and software (line) is clearly softening.

equipment software

Furthermore, even though most prognosticators are pointing toward a GDP recovery later this year the data for that won’t be released for months and months - so right now it is still just a prognostication. As such, my economic data table is classifying this release in the “bad and deteriorating” column. It will move when the data, rather than the forecasts, justifies it.

Economic Data
Bad and Deteriorating
Existing Homes (May)
Store sales (June 23)
New Home Sales (May)
ATA Truck Tonnage (May)
GDP (Q1 Final)

Bad but Improving
Chicago Fed NAI (May)
Durable Goods (May)

Good but Deteriorating
Consumer Confidence (June)

Good and Improving

Since there weren’t really dramatic revisions from the prior release (which I discussed then) there are few additional comments to make. The main one remains that profits are growing single-digit year/year. The current rally is on the back of investors being willing to pay more for each dollar of earnings.