1st Quarter GDP received its final revision today, this time down a catastrophic 2.9%. That’s the economy’s worst performance since 2009Q1. How did the markets react? You guessed it, they closed up on the bad news. [see related post: http://www.investablewealth.com/gdp-reduced-markets-hit-new-high/ ]
Not to worry, the economy is doing fabulous, it was just bad weather. They’re forecasting robust growth of 3% for the 2nd Quarter. But…if the issues in Q1 were strictly weather related, wouldn’t the pent up demand naturally roll over and accumulate in Q2?
Imagine it was too cold in March to run out and buy new golf clubs, or a dishwasher, or a car. Wouldn’t you just defer the purchase till April? These aren’t impulse buys, you need the clubs, washer, or car. So, if all that pent up demand was differed due to bad weather, why are they only predicting 3% growth in Q2? [Perhaps they’re lowballing so that enthusiasm will be strong if GDS beats estimates!]
Based on their forecast, here’s how I calculate GDP for the 1st Half: (-2.9 + 3)/2 = 0.05% growth
Does 0.05% sound like a robust economy to you? Since the Fed is predicting a 2.1% rate for the year, that means combined 2nd Half growth would need to be a minimum of 9.95%. Highly unlikely. [I was educated in public schools, so check my math.]
No need to fret or ponder over the details. Their predictions are horrid and the market hits new highs.
Here’s a quote on GDP growth from the Congressional Budget Office, February 2013: “CBO projects 3.4% in 2014 and an average of 3.6% a year from 2015 through 2018.” You can find similar overly optimistic projects going back to 2008. Remember, the Fed just reduced 2014 growth to 2.1-2.3%, not even close to 3.4% [in fact a downward revision of 38%]. That’s not a robust economy.
Based on Q1’s poor performance, I think a more likely scenario is 2014 growth of 1.5%. That is unless they change the formula for calculating GDP, again.
Be skeptical my friends, be very skeptical.