The government’s reports on quarterly GDP (gross domestic product) are the most detailed picture investors get of the state of the economy. The initial report for the second quarter shows an economy that’s still contracting but at a much slower pace than in the last two quarters. It also shows an economy where growth is very dependent on the much maligned Obama stimulus spending package and where consumers and CEOs are still sitting on their wallets.
In short it looks like the recession is coming to an end but that the recovery is going to be so slow and so shallow that many of us might not notice a whole lot of improvement. Certainly not initially.
Let me tease apart some of the numbers in this valuable but confusing report.
First, the top line number. This report, called the advance report, says that the U.S. economy shrank at an annualized rate of about 1% in the quarter. That means that if the economy contract at the second quarter rate for a year, it would be 1% smaller at the end of 12 months. Looked at another way, the economy shrank in size so that it is now 3.9% smaller than it was in the second quarter of 2008.
You need a bit of context before you can say whether those numbers are good or bad. Economists had ben expecting the report to show the economy contracting at a 1.5% annualized rate so in that context the second quarter report is good. It’s also good if you compare it to the 6.4% annualized rate of contaction reported in the last revision for the first quarter of 2009. (This second quarter report on GDP was what’s called the “advance” report. It’s the initial take on GDP and it’s followed by revised, and presumably more accurate vesions, called “preliminary” and “final.” The final report, actually, isn’t final because it’s followed up a year later by a final, final number.)
So it is accurate to say that the economy is still shrinking but that the rate at which it’s contracting is slowing. Good news.
But before you cheer or boo any GDP number, you always need to dive down a level and see where the growth or lack of it is coming from.
On this level, the report definitely gives us something to worry about.Â
First, the consumer is still not consuming. Personal consumption expenditures, which account for 60-70% of U.S. economic activity fell at an annualized rate of 1.2%. That wound up subtracting from the GDP growth rate for the second quarter and is a big disappointment after the first quarter when personal consumption expenditures added to GDP growth.
Second, the second biggest contributor to GDP growth in the quarter was government spending–what the report calls government consumption expenditures. It added about 1.12 percentage points to the second quarter GDP growth rate. That was a huge shift from the first quarter when government spending subtracted about half a percentage point from GDP growth. It’s a sign that the stimulus package has indeed started to work its way into the economy. But combined with the fall in consumer spending it raises the nasty question Is the stimulus is actually going to jump start the economy? What we need to see is that government spending stimulate a pickup in consumer spending and we haven’t seen that so far. Without that kind of pickup, when the stimulus is all spent, the economy will drift back into a slump.
The one item that I’d call unequivocal good news was the increase in net exports. That added 1.38 percentage points to the GDP growth rate.
Jim, I too am considered a baby boomer and facing retirement without a steady stream of income. i have invested in Muni bonds for the state of California and hope it is a wise move. Please let me know where else I should go especially what should be put into a 401 plan since it is now all in money market.
Even in retirement, I think equity exposure in developing economies has to play a considerable part of financial planning. In addition to the recent economic debacle, we are facing some pretty tough demographic trends that a lot of smart people are saying will limit our GDP to around 2.4%. That’s just barely enough to keep jobs from contracting and not enough to grow jobs. That’s not just for the near future, that’s a decades long projection.
The boomers are aging, considerably less financially secure and most certainly entering their frugality years. Demand for goods and services that have provided the 4% growth rate in GDP for the last decade or two simply isn’t there. That’s where the emerging markets start looking attractive.
Frankly, I see being overweight exposure to emerging markets as less risky than being in many domestic stocks that have cloudy growth prospects given the macro climate in developed nations.
I’d respectfully suggest considering domestic companies with large export operations (they certainly lead GDP growth and stayed positive longer than any other sector during the contraction) and companies that can profit from a rising middle class in the developing nations, whether domestic exporters or foreign growth companies.
I don’t think anyone has to try to be too cute with their selections so long as they stay consistant with the theme. Jim’s selections are loaded with companies that fit the theme and buying on pullbacks and weakness even now is what I’m doing.
mathruchandnani, my largest holding right now is cash. most of the stocks, in my opinion, are overpriced, and, I believe, correction is coming. however, my watch-list is pretty long, so I keep my eyes open to buy good companies, when depressing mood starts to dominate the market.
thanks VIWI
I am retired so questions is where to invest money? specifically where would you park your mney and getting decent return. I have been thinking abt investing in preferred stocks say about 10% of my portfolio. Is that too much. Any other ideas will be welcome
mathruchandnani, I think it all depends on what you consider “investment” in this current economy. Whatever I buy on a “dip” appears to grow 20-30% in less than 1 month, which I consider a very good investment. However, I personally do not call it “investment”, even though I am buying solid companies. Market volatility is so high that all “investments” seem like “speculations” to me.
In the same time, if you read earlier Jim’s posts, almost any company, which is set to survive this downturn (and he has a very long list of those companies), will be a good investment, if you can wait 2-3 years.
Jim,
How do you invest in this environment?
Jim,
Am I being too simplistic when I think all these numbers boil down to how much and how long can we borrow from our kids?