US GDP Grew in Q1: Where is That Recession?

Far from a recession, the economy is still growing...

The U.S. Commerce Department said the economy grew at an annual rate of 0.6% in the first three months of the year, in an initial estimate of gross domestic product for the quarter. The growth matches that of 2007's final period.

Housing hit the economy. Residential fixed investment dropped by 26.7%, reducing overall GDP by 1.23 percentage points. In short, GDP growth absent housing as an acceptable 1.8%.

Clearly financials like Citigroup (C), Wachovia (WB), Merrill Lynch (MER) and Bank of America (BAC) and their investors have suffered. If you are an investor in housing related stocks like Centex (CTX), USG (USG) and DR Horton (DRH) the last thing you want to hear is that the economy is not in recession. In your corner of the world it clearly is. However, while the economy as a whole is growing at a far from acceptable rate, it is STILL GROWING.

Even Berkshire's (BRK.A) Warren Buffett jumped on the recession call saying we were already in one. I have to ask Warren about this one. He always says he does not invest on "macro forecasts" because they are never accurate. He also replies when asked about what is going to happen in the future "I have no idea". My question then is, "why then is he making macro predictions and forecasts now?" To be honest, Warren is the greatest investor ever but he is on TV just way too much lately. What he said meant more when we heard from him occasionally, rather than weekly.

I feel bad for those making the treck out to Omaha this weekend for the annual meeting. What could they possibly hear from him he has not said at least 5 times in the scores of interviews he has done the past two months? I have done it in the past and it is a great time, but we were hearing new stuff back then, not the rehash this year's attendees will get.

Anyway, this quarter's growth illustrates the strength of the economy. To take the massive hits from both housing and the credit markets and still be expanding is quite impressive. These numbers now push the odds of having an actual recession even lower than they were a month ago. In order to actually have a recession now we need the spring and summer numbers to contract. The need for this from the recession camp is facing strong headwinds as last year's rate cuts begin to hit the system and $150 billion in stimulus checks start showing up on consumer doorsteps.

Should Bernanke & Co. take steps to strengthen the dollar, we can add lower energy and food prices to the list. Does this mean we jump to 2% to 3% growth this summer? No. It does mean we ought not see a negative number and given what has happened the last 12 months, that is just fine.

People were fond of saying that Alan Greenspan engineered a "soft landing" when he was the head of the Fed. When this is all over, Bernanke ought to be credited with engineering a "fly by" in far more difficult circumstances.

Disclosure: Long C,WB.

Comments

[Villanova Capital Group]

What strength of the economy are you referring to? Government reports are nothing more than works of fiction, ala a Stephen King film or more appropriately, The Twilight Zone. You can play the game and trade off the reports and the resulting sentiment, but I caution against real-world actual reliance on such dung.

[User 1442]

While you rightly say that excluding housing, GDP grew at an acceptable pace (more so in the face of fairly depressing economic commentary of late), I'm not sure if excluding housing from the GDP calculation makes much sense.
It accounts for a fair share of GDP (more so incremental GDP growth).
More importantly, it has played a pivotal role in the creation of employment, particularly in the last 3 years. In fact Financials, and housing are two sectors that have been major drivers of corporate earnings, during this time. The sharp run up in home prices, and it's impact on consumer spending through equity-withdrawals, have propelled GDP
It's hard to see how the US can avoid a recession (or a fairly significant slowdown) untill the correction in home-prices, and attendant problems in credit markets play themselves out completely. To ignore Housing and look at the Economy, would be akin to a denial of economic reality.

[David Lentz]

Perhaps, Todd, if you were to look at the track record of the Commerce Department's reports alongside the track record of their revisions to those reports, and ponder for just a moment the fact that the Commerce Department is a part of a political organization and not simply a disinterested bystander, you might choose a different metric to buttress your convictions that everything is just peachy-keen, rising prices and unemployment notwithstanding.

I guess this blog posting means that you are long some financial stocks. Good luck with that.

By the way, are you still turning the crank on your rant that Apple will never come close to selling 10 million iPhones by the end of 2008? Or was that public position simply a ruse to try and generate more downward momentum for your puts? I sure hope you took your profits before AAPL turned up a while back.

And before you toss off the assessment of -- in your words -- the "greatest investor ever", and complain that he is getting more TV time than you are, perhaps it is because he does a better job of growing investor's money than you that he gets all that air time. If you would focus just a wee bit more on dispensing advice that works instead of advice that fits your investment posture you might get a bit more respect.

It must be pretty easy to make money in the markets, 'cause apparently you still have some left to lose.

[billddrummer]

Thank you Tood, very compelling article. Slow growth aside, it's almost as if the economy is pausing before its next expansionist phase. As the rate cuts and stimulus checks move through, it seems reasonable to expect growth to accelerate in the 2nd quarter. And that will presage stronger performance in the back half of 2008. Just like you said back in February.

[jayz]

remember that recession can happen without a negative GDP, plus, hold off on these Uncle Ben love fest til it is all over, wil'ya?

[gordon]

How can you have a CPI 4.5% but a deflater around 2.5%? They are lying about inflation imput prices to show a positive GDP. Everyone knows that, are you drinking the koolaid served on CNBC? Your going to tell us "INFLATION IS MODERATING "? GDP has been negative at LEAST 2 quarters.

[Al from CT]

Financials have crashed and burned, too much virtual value disappearing. Housing industry is crashing as well, back down to the level were the average person can even afford a house, whenever the banks get around to writing mortgages again. In spite of this, the economy is stable.

If these two sectors are sucking the wind out of the economy, then something else is going gangbusters to compensate. Subtact them out of the S&P 500 earnings for Q1 and earnings growth is still almost double digit positive.

By historical standards 5.1% unemployment is exceptionally low.

You can think gloom and doom, I'm thinking that the economy is showing to be incredibly resilient.

[nickgogerty]

the price deflator in the calculation looked low to me. Regardless the variance inherent in the forthcoming revision, means that todays 0.6 isn't really meaningful one way or the other. By the way is anyone reading this going to change their behavior much if it was -0.6.

[dustbusterz]

Todd Sullivan, andAl from CT, you are both completely blind.

You look at things from a federal stand point. Again, the Governemnt lies you know this as well as anybody. So, you put all this stock in their numbers? you cannot exclude housing,oil and commodities and get an accurate fix on GDP or inflation. These numbers count too much into our growth to exclude those. Second, you take a look at all those people who are loosing their homes due to the sub prime mess and ask yourself ,where is this expected growth in the second have of 08 coming from? Also,with the slowdown in the economy, many people out of work won't have the cash to pay their normal expenses let alone, any extras.Those who are still employed, many(like myself) are under employed(meaning we get fewer than 40 hours) so there is a lack of cash to do anything, or go shopping, so again, I ask, where is this second half growth coming from?
Our inflation is now affecting Europe, and you think their spending won't slow too? Which will eventually hurt our exports ,again hurting the only thing that might be doing well right now. Come on, take your heads out your asses and see the light of day. Buffett is right, this recession will be worse than most even expected. And you don't need negative GDP growth to experience recession in the first place.

[underdose]

I agree with Mr. Sullivan that we are not in a recession. That is as true as it was true that Enron was gloriously profitable. Or wait, Enron, who clearly deserved an "F-", supplied us with their own report card that showed an "A+". People can and do commit fraud when they are failing at their jobs and get to give their own evaluation of how they are doing. Enron was the most highly publicized example of that fact, but only one example of many. Raise your hand if you think our government typically acts with honesty and integrity, any more so than the executives of companies like Enron. To publically admit that there is a recession, the government would be giving itself an "F". Given the chance to rain money from the sky, both through stimulus checks and a negative real federal funds rate, the government can cause NOMINAL gains in the GDP through inflation. Then by using a ludicrously low GDP deflator, dishonestly understating inflation, they can fraudulently claim real GDP growth. In short, they are cooking the books, just as Enron did. You would think after all the accounting fraud that was uncovered during the last economic downturn, we would have learned our lesson and be on the lookout for it now. We absolutely are in a recession by objective measures. Mr. Sullivan, I'm sorry but your case falls flat on the questionable credibility of your sources.

[underdose]

As a followup (in the off chance anyone reads this months after the original article was posted), I would like to offer to Mr. Sullivan (and all readers for that matter) a better measure of economic strength. How would you measure your own financial strength? Perhaps how much disposable income you have after meeting your financial obligations. If you have a high salary, and live comfortably within your means, you are financially strong. If, on the other hand, you live hand to mouth, or even spend more than you make by running up the credit cards, you are financially weak. The same evaluation should apply to a nation. If the nation consumes more than it produces, and borrows the shortfall, it is financially weak. The heartbreaking truth is that the US economy is in fact very weak, and was all through the so-called "boom" during the housing run-up. We currently are on pace to have a trade deficit of over $700 billion for 2008. The trade deficit was over $700 billion in 2007, and was even higher in previous years when the GDP numbers were stronger. Touting GDP numbers during a period of so much importing is like saying "I borrowed a lot of money to buy a lot of crap. I'm really rich!!"