First Quarter 2010 GDP Advance


First Quarter 2010 GDP Advance

Posted by Karl Denninger

So the data is out….

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.2 percent in the first quarter of 2010, (that is, from the fourth quarter to the first quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 5.6 percent.

Well, that’s not what the previous quarter was, but it’s also no surprise.

The deceleration in real GDP in the first quarter primarily reflected decelerations in private inventory investment and in exports, a downturn in residential fixed investment, and a larger decrease in state and local government spending that were partly offset by an acceleration in PCE and a deceleration in imports.

The inventory cycle is about done, residential fixed investment hasn’t turned around at all and in fact is still declining, and state and local government spending is down – they’re out of money!

There are some interesting data points inside the release.  Of note:

  • Durables were up big – 11.3%.  Most of this is probably improvement in vehicles, if the reports from the first quarter automakers are to be believed.  Considering that they were in all-on crash mode last year and into the end of 2009, this is good for them – not so good for anything else.

  • In domestic private investment the only place we saw gains was in “equipment and software.”  Residential and non-residential structures were both down big, seasonally adjusted (10.9% and 14%, respectively.)  But the CapEx cycle that everyone is counting on for continued expansion is slowing q/o/q; it was up 19% last quarter, and is now up 13.4%.  While that’s a significant positive print if this was a short spurt and is now tapering off we got trouble in the back half of the year.  The jury remains out on this one.

  • Net exports were up nicely.  Hint-hint: Policies that strengthen or stabilize the dollar will help this continue – like, for example, abandoning ZIRP!
  • Government spending is very interesting.  The Federal government, of course, continues to spend.  But most of the government’s deficit spending isn’t going into direct expenditures – it is instead going into transfer payments and handouts of various sorts, as the total federal spending was up only 1.4%.  State and local spending were down big, as they’re simply out of money.

  • Finally, disposable personal income was up just 1.5%.  Where is all the federal borrowing going? 

I’m concerned with these numbers – quite concerned in fact.  The Federal Government borrowed (and presumably spent) $462 billion in excess of tax receipts over the first three months of 2010. 

But PCE – personal consumption expenditures – was up $83 billion and federal spending was up only 3.5 billion. 

Where did the other $375 billion go?

Into a black hole of covering existing obligations, it appears, and the final private demand GDP deficit covered by this is almost exactly 10% (GDP for the quarter is ~3.650 trillion, so $375 billion is roughly 10% of that.)

What does this mean?  It means we’ve not turned the corner on this graph, which was current as of 12/31/2009 (and which I can’t get an accurate read on until the end of this year):

I don’t like it folks.  All the claims of “economic recovery” are in fact claims of “government is propping up 10% of final demand, and that propping up is disappearing into a black hole.”

There’s no evidence in this report that the economy is recovering – that is, that the artificial “borrowed and spent” support the government has been providing for the last two years is being replaced with actual final demand.

The positives in the GDP report are automobiles (strong this quarter) and a positive, but weakening CapEx cycle in business spending. 

But the key item for me in this series, which is evidence that the federal government’s replacement of final private demand is moderating and being picked up by private economic activity, is utterly absent. In fact the influence of those dollars, as shown by the final print compared to last quarter, is waning.

One-sentence summary: The rocket is running out of fuel.

We need this to continue – if it reverses, we’re cooked and fast.  Bernanke needs to raise rates to above that of the ECB.  He may get some help if a few European nations collapse, of course – but if they wind up at zero, we need to be at 1%, and that divergence needs to be established right now.  We do NOT want a skyrocketing dollar, but because we import too much of our raw materials and it is the “value added” that we get to keep, we want cheaper imports of those materials – and we get that by being able to buy them with a stronger buck.  The specific issue here is energy (oil prices); we can’t have oil going back over $100, and the best way to prevent it is to get rid of ZIRP.