The 1st quarter advance GDP report was released. Estimates were for 3.4% growth, but we saw 3.2% reported. 3.2% GDP growth is very respectable and likely one of the highest growth rates we’ll see in the next several years.
The report’s good news is consumers increased spending and helped propel economic growth last quarter. The bad news is they reduced their savings rate to about 3% — and 3% just won’t cut it folks. We need to revert back to the days of personal responsibility and increase our savings rate to the 8-10% range or everyone will be retiring poor and relying on Social Security -which will be bankrupt before most of us get what’s promised. As the savings rate increases — to even just the 8% level — we’ll see the economy stagnate because taking 5% of consumer spending out of the economy will reduce economic growth.
Another comment on the 1st Q GDP report is that half the growth came from an inventory rebuild – which is a transitory GDP contributor. That means we can expect to see this factor evaporate and thus reduce our GDP growth figures in future quarters.
And also keep in mind the recent pattern of the Bureau of Economic Analysis whereby the advance GDP estimate is revised lower in future reports when more details are known. In other words, there’s a good chance we’ll see the 3.2% GDP growth figure announced on Friday lowered to 3.0% when the BEA knows more in 2 month’s time.
Here’s what really matters: Current stock prices reflect an extrapolated GDP growth rate like we saw in 4Q 2009 -namely 5.6%. That’s what is baked into this years & next years stock market earnings. Pretty soon investors will begin to understand that the current stock market is priced for a robust economic recovery that’s not going to happen. It’s my view that we’ll see a continued pronounced slowdown in economic growth in the second half of the year as housing continues to act like an economic anchor, and as the federal government stops extending the record-setting 99 weeks of unemployment benefits.