Saturday, May 1, 2010

First Quarter GDP Shows Recovery... But How Real Is It?

Yesterday, the preliminary estimate of 1st quarter Gross Domestic Product (GDP) was released, indicating an annualized growth rate of 3.2% - down from the 5.6% annualized rate for the 4th quarter of 2009.  Within minutes, officials of the Obama Administration were all over the media declaring the recession over and trumpeting the efficacy of their various stimulus plans.  Strangely, after blaming the weather for the lack of job growth in recent months, they failed to credit the weather for the excellent economic news.

As with any government economic report, the headline number is a facade to the real story underneath.  Worry not.  Marko's Take, along with our staff of experts, is here to dissect the report and reveal the truth as to what's really taking place.

Spending by consumers rose at a 3.6% rate, more than double the 4th quarter pace and faster than any quarter in the past three years.  But half the quarter's growth came from firms rebuilding inventories.

Consumer spending, which accounts for about 70% of the demand in the economy, remains the key.  Consumer confidence has improved quite a bit from the bottom of the financial crisis, but remains depressed. The University of Michigan's Consumer Sentiment Index, released Friday, dropped slightly to 72.2 in April from 73.6 in March — and was well below the pre-recession levels, which exceeded 90.

Friday's data showed reported inflation remains tame, even as the economy climbs out of recession.  The Federal Reserve's preferred gauge, the price index for Personal Consumption Expenditures, or the PCE deflator, excluding food and energy, rose an annualized 0.6% in the 1st quarter, compared with the 4th quarter's 1.8%.  The Labor Department's employment cost index, the broadest measure of wages and benefits, rose 0.6% in the first quarter from the fourth, and was 1.7% higher than a year earlier.

Long-time readers know that we are not only highly skeptical of any economic new emanating from Washington, but that we can see right through the BS.  Fortunately, we have the brilliant Dr. Williams and his fantastic site ShadowStats (http://www.shadowstats.com/) to assist us in this endeavor.

According to ShadowStats, the Alternate-GDP estimate for first-quarter 2010 was an approximate annual CONTRACTION of 1.5%. This reflects the bottom-bouncing at low levels of activity seen for much of the last year in key underlying economic series, not an economic recovery.

More disturbing is the analysis performed by Dr. Williams on the Money Supply.  With just more than two weeks of reporting on April money supply, weekly contractions in M2 (institutional money funds and large time deposits) suggest that the pace of decline in the broader M3 is accelerating, with the nominal year-to-year change reflecting a record annual decline of roughly 4.8% in April, versus a decline of roughly 3.7% in March, if weekly reporting showed no further changes for the balance April.

According to Dr. Williams, real year-to-year change appears likely to deteriorate from a 5.8% contraction in March to an unprecedented reading of a 7% annual decline.  Contracting annual growth in broad money supply nearly always precedes decelerating economic activity.

The contraction is money supply aggregates also signals systemic difficulties in the banking system.  A properly functioning U.S. banking system would be lending increasing amounts of money, not contributing to a slow downward spiral in consumer and business credit outstanding and a pending renewed decline in economic activity.

The best way to really gauge what's going on is to pay attention to what you see anecdotally.  Are you having trouble keeping up?  Are your friends and family struggling?  Are you paying more for food and gas and critical goods?  These are better indicators than what Washington reports.  Ultimately, if the "good" news is helping you, that what "good" is it?

Marko's Take

The California Wildlife Center is having a 5K walk on Sunday, May 2nd in Malibu.  I'll be there, with my fellow "whacko-tarians".  For more information on this wonderful organization and cause, please click here http://www.californiawildlifecenter.org/.

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