Q1 GDP - Consumer Weaker As Weather Saves The Day
Today's release of the final estimate of 1st Quarter GDP came in unchanged at 1.9% at the headline which was sharply lower than the 3% growth rate in the 4th quarter of 2011. However, what was masked by the headline, was the impact of the unseasonably warm winter that boosted construction spending while the rest of the economy deteriorated. The chart shows the changes between the second and final estimates of GDP.
[NOTE: All GDP and related data are subject to an annual revision on July 27th that will restate economic history since first-quarter 2009. The aggregate revisions should show a historically weaker economy.]
As you will see the consumer was weaker than originally estimated along with all the areas that the consumer directly effects - goods and services. The warmest winter over the last 65 years helped to boost construction spending and investment more than originally estimated which provided the offset from the drag in virtually every other category. Had it not been for this higher estimation in construction spending our estimate of 1.7% would have been obtained.
The push to construction and investment is likely to weaken going into the second, and probably third quarters of 2012, as the realignment of the weather to more normal seasonal patterns removes the skew to the data. Recent decreases in manufacturing reports, slowing in employment and continued pressures on wages all point to a weaker GDP print in the 2nd quarter. The one saving grace at this point is the decline in oil and gasoline prices which is providing much needed relief to the consumer.
The real key issue continues to be the sustainability of the consumer going forward. It always pays never to underestimate the resourcefulness of the consumer. In recent reports we have discussed that consumers are turning to all sorts of unconventional resources to find additional income. This dependency on government handouts, debt and credit has negative long term ramifications for economic growth.
Real Final Sales improved marginally in the 1st quarter by .44% but the recovery was not enough to pull the index out of recessionary warning levels. In the past, every time real final sales has fallen below the 2% annualized growth rate level, currently at 1.93%, the economy has either been in, or was about to be in a recession. Since the end of the last recession in 2009 - real final sales have been below 2% growth 8 out of the last 11 quarters. That is unprecedented to any other time in history. Normally, 11 quarters post a recession, real final sales are growing at an average of 4.08% not 1.93%.
As we discussed in our recent report on durable goods: "With the Eurozone already in recession the drag on exports is increasing. While the U.S. and Eurozone economies have decoupled - the recent slate of economic reports is now calling the sustainability of that decoupling into question." Exports have accounted for fully 41% of rebound in the economy post the last recession which is far outside the norm. The effect of declining wage growth, excess debt and the lack of availability of credit - the U.S. consumer has remained suppressed on many levels while the economy disproportionately gained traction from foreign markets. With the Euro Zone and Emerging Markets now struggling with slowdowns and outright recessions - the U.S. could be very quick to follow.
The economy is currently growing at 1.9% as of the latest report. This is the 4th quarter in a row that the economy has grown at a sub-2% growth rate without being in a recession. This has NEVER occurred previously in the history of the U.S. economy. Without the successive rounds of fiscal stimulus, bailouts, interventions and injections it is most probable that the economy would have succumbed to a recession already. Unfortunately, while the trillions of dollars that have been injected to date have kept the economy out of a statistical recession - 65% of Americans currently believe we are in a recession already as they struggle to make ends meet.
In contrast to the stabilized GDP estimate, growth in gross national product (GNP) revised sharply lower. GNP is the broadest national income measure of U.S. economic activity, where GDP is GNP net of trade in factor-income, or interest and dividend payments. The first revision to this number (initial GNP reporting was last month) showed headline growth slowing to 0.5%, from the first estimate of 1.3%, and against 1.8% in the fourth-quarter. Year-to-year growth was revised to 1.6% (previously 1.8%), versus an annual growth rate of 1.8% in the fourth-quarter.
As John Williams stated: "The United States holds net-debtor-nation status. The recent relative weakness in U.S. GNP versus GDP reflects an accelerating surge in interest and dividend payments to the rest of the world from the United States, along with a declining pace of payment inflows to the United States from the rest of the world." This isn't surprising given the struggles that currently engulf the globe.
There has been a rising chorus of calls as of late that the economy is already in a recession. For all intents and purposes that may well be the case but the economic numbers do not currently reveal that. What we are fairly confident of is that with the weakness that we have seen in the recent swath of economic reports is that the 2nd quarter GDP will likely be as weak, or weaker, than the first. It is this environment, combined with the Euro Zone crisis and weak stock markets, that will give the Federal Reserve the latitude to launch a 3rd round of bond buying to inject liquidity into the market. While the impact of such a program may be muted - it will likely push off an outright recession into next year.