The GDP figure came in better than expected this morning. Who in their right mind would think that Jan Hatzius and the boys at Goldman could be so wrong? Perhaps they aren’t infallible after all? The headline number came in at 3.5% which was better than the 3% consensus. The bounce in GDP largely reflected the stimulus boost and cash for clunkers, but there were also some encouraging signs in the data. Cash for clunkers added about 1.66% to the data, but PCE’s and investment were better than expected. Econoday reports:
PCEs rose an annualized 3.4 percent, led by durables with a 22.3 percent jump. Residential investment made a partial rebound of 23.4 percent-the first gain since a 2.6 percent rise in the second quarter of 2006.
The GDP price index was in at 0.8% and continues to reflect the low inflationary environment. Despite the big miss by Goldman Sachs’ Hatzius he continues to turn a bit more negative on his overall outlook. In a recent note he says the real economy is probably weaker than the stock market represents:
Beyond the near-term “bean count,” our broader call for a sluggish recovery with falling inflation and continued low interest rates remains unchanged. It is based on two considerations. First, the overall economy is probably weaker at present than suggested by many standard indicators and the strength in the equity market because smaller companies—which are underrepresented in standard indicators and are not publicly traded—are underperforming larger ones. Hence, there is a significant chance that growth in the second half of 2009 will be revised down from whatever preliminary estimates the government statisticians publish over the next few months, once more complete source data become
He is also growing increasingly concerned about the end of the fiscal stimulus. He expects the headwinds from the labor market, consumer deleveraging, excess housing supply and state and local budget cutbacks to weigh on the markets:
Second, the economy will lose the benefit of the fiscal stimulus and the inventory cycle over the next year. We estimate that these factors are worth a total of 4 percentage points in terms of the impact on annualized real GDP growth in the second half of 2009. If our estimate is correct, growth will slow over the next year unless underlying final demand growth—“organic” growth, if you will—picks up by 4 percentage points or more. While some improvement in organic growth is likely, we expect it to fall well short of 4 percentage points given the continued headwinds from the weakness in the labor market, consumer deleveraging, excess housing supply, and state and local budget cutbacks.
On the jobs front we continue to see extraordinarily high jobless claims data. This mornings figure came in at 530K with continuing claims falling 148K to 5.8MM.
All in all, the data should be strong enough to provide a near-term lift to equities, but does little to replace our thesis that the economic recovery has been largely built on stimulus as opposed to organic growth. I think Hatzius will ultimately look more prescient than he did this morning. This recovery will continue to be below trend and 2010 is shaping up to be quite a disappointment.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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