Fisher Investments Editorial Staff
US Economy

Don’t Call It a Comeback

By, 08/03/2009

Story Highlights:

  • The US Commerce Department announced real Q2 GDP shrank at an annualized pace of -1.0%— much better than the expected -1.5%.
  • The components of GDP were a mixed bag, revealing areas of weakness and possible future strength.
  •  Forecasters are begrudgingly acknowledging improvement, but most remain extremely cautious.
  • Stocks should benefit as low expectations greatly increase the likelihood of positive surprises.

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Just months ago, the US economy was written off by many as a relic of excessive consumption, irresponsible indebtedness, and unsustainable greed. But our economic machine with its capitalistic parts could be primed to steam ahead once again. Increasingly, prognosticators are sensing a comeback for the US economy.

Hints of improvement were engrained in Friday's GDP report. The US Commerce Department announced real Q2 GDP shrank at an annualized pace of -1.0%—much better than the expected -1.5% contraction and much less scary than prior quarters' figures. Without a doubt, the components of Q2 GDP were somewhat of a mixed bag. Personal consumption decreased, which isn't surprising given rising unemployment and corresponding downward pressure on wages. Both imports and exports fell, but imports fell more, so net exports gave GDP a boost. Inventories were again negative, but as we've said, inventory draw downs are a future positive as firms must place new orders to restock shelves. Housing construction remains a drag. Residential investment dropped at an annualized rate of -29.3%—an eye-popping number, yet residential investment accounts for only about 3% of GDP, so the impact on the economy is actually very small no matter how much it rises or falls. Government spending—negative in last quarter's GDP report—had a positive impact in Q2. And that's with only a small portion of government stimulus spent so far. Going forward, deploying stimulus will undoubtedly cause government spending to rise providing a tailwind to economic growth for some time to come.

Q2 marks the fourth consecutive quarterly contraction in the US economy. In the three prior quarters, GDP declined by -6.4%, -5.4%, and -2.7%. Add those up with the Q2 2009 number and the magnitude of economic contraction appears startling. But keep in mind these are annualized numbers—they extrapolate one quarter's economic growth out over a whole year. In total, real GDP has actually shrunk by -3.9% since its peak in Q2 2008, and growth is expected to resume next quarter. That's not great, but it's not disastrous either.

The yawn from investors following Friday's report was almost audible. US stocks closed the day essentially flat, capping off another strong week and month. It's clear concerns of another Great Depression have largely and rightfully dissipated, but economic expectations have recovered only slightly. Most acknowledge a recovery is in the works but are quick to label it "anemic" or "below trend." Accompanying these low economic expectations are forecasts of lackluster returns for stocks. Economic and market forecasts are begrudgingly being raised, but anything more than extremely cautious optimism is hard to find. This is good for markets because economic activity, earnings, and stock performance can more easily exceed low expectations leading to positive surprises. And just as important: Many foreign economies are poised for even stronger growth, which will benefit the US as well. Expect stocks to rise well before significant improvement shows up in backward-looking economic data as investors realize beforehand an economic comeback is unfolding.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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