Don't Panic (Yet), But The Economy May Be Shrinking

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) was up 21 points in early afternoon trading Wednesday after the Bureau of Economic Analysis' initial estimate of first-quarter GDP showed only 0.1% growth. That's down from the 2.6% growth reported for the fourth quarter of last year.

Wait, 0.1%? That's really bad, right? 

Yes, in a vacuum, that's not exactly good. It's actually the lowest since the fourth quarter of 2012. But fortunately we don't live in a vacuum, so there's hope for the U.S. yet.

Let's break down the report.

The good (sort of)
Consumer spending represents about two-thirds of the U.S. economy, making it the single largest driverIn the first quarter that spending grew 3% and provided the main force for GDP growth. However, spending did decelerate from the 3.3% growth in the fourth quarter. 

The big rise in consumer spending was driven by a 4.4% increase in spending on services, primarily health care and energy. Health services accounted for about half of that increase, and about one-third was driven by increased heating bills (hat tip to the polar vortex).

Spending on goods increased just 0.4% and weighed down the figure somewhat.

So on the surface it would appear the U.S. consumer is back in force, moving the country back to the long-term 3% GDP growth rate we all hope for. We could even point to improvements in the labor market to support that argument.

US Unemployment Rate Chart

US Unemployment Rate data by YCharts.

The unfortunate reality, though, is that a particularly cold winter and the implementation of the Affordable Care Act have much more to do with the strong consumer spending growth than any other factors.

The bad
If the consumer side is struggling just below the surface, then the business side of the GDP calculation absolutely sank. 

Spending on equipment fell at a 5.5% annualized rate, while nonresidential investment fell 2.1%. Inventories subtracted 0.57% from GDP growth. Residential investment contributed just 0.18% to growth, about half the level witnessed for all of 2013.

Worse yet, the export picture makes the domestic struggles look downright rosy. The trade gap widened considerably in the first quarter as exports fell a dramatic 7.3%. The export of goods was even worse, falling 12%.

Taken together, this is not a very pretty picture. But, as with all things macroeconomic, there is some nuance and reason still for optimism.

We're gonna panic like its 1873? No, we're not. Engraving of the Panic of 1973 in Vienna that led to the Long Depression

Don't panic yet, there's more to the story

As we discussed yesterday, this morning's report offers an advanced figure that will be revised at least two times before the BEA settles on a number for the history books. And even then it's just a best guess, so these figures should always be taken with a grain of salt.

And there may be some relief for the export side of the data when the Commerce Department releases March's actual export numbers on May 6.

In its coverage of the GDP report, Wells Fargo pointed to a timing anomaly surrounding the Chinese New Year that could be swinging the data. It said:

The earlier timing of the Chinese New Year [which fell in February this year] apparently led to a surge in exports late last year and a sharp pullback in February. Recent data from the Port of Los Angeles and Port of Long Beach notes that exports rebounded in March.

In the report released today, the BEA estimated a 0.9% rebound in exports in March. If that number was actually higher, which it very well could be, then GDP may be revised considerably upward in the next few weeks. If it misses, we could be looking at a shrinking economy and a potential recession.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2937253, ~/Articles/ArticleHandler.aspx, 9/5/2015 1:45:57 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Jay Jenkins

Anticipating opportunity, filtering out the noise, and figuring out what it all has to do with the price of rice in China. Like me on Facebook here!

Today's Market

updated 4 hours ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 4:30 PM
^DJI $16102.38 Down -272.38 -1.66%