Although slower than the fourth quarter 2009 growth of 5.6 percent, U.S. gross domestic product (GDP) grew by 3.7 percent in the first quarter of 2010 [revised 07-30-10 from prior revision of 06-25-10, which showed +2.7 percent growth, revising the second estimate of +3.0 percent issued 05-27-10, which revised the original estimate of +3.2 percent]. Though this figure may disappoint the markets, it represents stronger growth than many, this author included, believed we would see this year.
While the inventory component was the driver behind fourth quarter growth, the first quarter was energized by consumers and business investment (equipment purchases) as real final sales to domestic purchasers rose an improved 2.2 percent in the first quarter after an anemic 1.4 percent rise the period before. Although inventories rose, the “swing” in inventories was less positive than the drop in destocking the fourth quarter. In fact, sharply less negative adds more to GDP than slightly more positive—the overall change, or “swing,” is what matters. Net exports, however, worsened on a slowing in exports and continued increase in imports.
I had expected a prolonged slump in consumer spending in the U.S. However, the recent retail sales figures and now the GDP data are showing that the U.S. consumer is spending again—not like he or she did before the financial crisis, but certainly in greater amounts than I and other economists had anticipated. Thus, investors may want to shift their portfolios toward companies that sell to the U.S. consumer. Also, with continued sovereign debt problems on the European continent, strength in the U.S. dollar vs. the Euro will benefit companies that sell goods in dollars.
Remember, some analysts will stick to the story they have been telling no matter what the data says—there are those who doggedly assert that another U.S. market crash is coming, whether through anemic consumer spending or municipal bankruptcies or what-have-you. While most of these theories were plausible, the data trend is suggesting that the U.S. economy is coming out of the crisis better than expected and although there may be problems ahead (commercial real estate and the fiscal deficit to name two), this is not a time for investors to bet against the U.S. When the data changes, we must recognize the change and plan accordingly—sticking to dogma will only lose money. The point of investing is to, first, preserve wealth and, second, to grow it—it is not to invest according to an ideology.
The GDP report also contained good news on inflation. The GDP price index rose an annualized 0.9 percent (well below the Federal Reserve’s target of 2 percent), following a 0.5 percent increase in the fourth quarter. The latest number essentially matched the consensus forecast for a 1.0 percent increase in the overall price index.
For more statistics from the 1Q 2010 U.S. GDP report, please click on the “Economic Growth Statistics” page on the menu bar at the top of the blog.
Gregg D. Killoren
victoria1014
