US GDP Grew in Q1: Where is That Recession?

by: Todd Sullivan

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 (NYSE:C), Wachovia (NASDAQ:WB), Merrill Lynch (MER) and Bank of America (NYSE:BAC) and their investors have suffered. If you are an investor in housing related stocks like Centex (CTX), USG (NYSE:USG) and DR Horton (NYSE: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 (NYSE: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.

About this article:

Expand
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here