Fisher Investments Editorial Staff
GDP, US Economy

Third Time’s Also a Charm

By, 05/03/2010

Story Highlights:

  • Preliminary readings show Q1 GDP expanded at 3.2% annualized.
  • Notably, the main driver behind Q1 GDP growth was a 3.6% annualized increase in personal consumption.
  • Overall, the numbers show the economy is unquestionably improving, and encouragingly, the factors driving Q1 GDP growth could remain in place for some time.

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Pessimism about the US economic recovery is a hard sell these days. Naysayers might have gotten away with calling Q3 2009's 2.2% annualized GDP rise a fluke and Q4 2009's 5.6% jump an anomaly. But when the third time's also a charm for the US economy—preliminary readings show Q1 GDP expanded at 3.2% annualized—doubters have a shakier ground to stand on. Which is just fine to us.

Q1's increase was a hair below economists' forecasts, but taken together with Q4, the two quarters represent the best six month GDP growth since 2003.

Notably, the main driver behind Q1 GDP growth was a 3.6% annualized increase in personal consumption. Since the recession's onset, the "death of the consumer" has been atop pessimists' ominous list of reasons the recovery will stall. But in Q1, consumer spending rose past pre-recession levels to a new all-time high—proving the consumers' eulogy was a bit premature.

Companies opened their wallets too, with equipment expenditures and inventory restocking contributing positively to Q1 GDP growth. Government spending on the whole detracted slightly from growth as reduced state and municipal spending exceeded increases in federal spending. Also dinging growth—residential and commercial real estate investments unsurprisingly fell. Both import and exports rose reflecting improving global trade.

Overall, the numbers show the economy is unquestionably improving. Encouragingly, the factors driving Q1 GDP growth should remain in place for some time. Firms are sitting on hoards of cash, once again have access to credit, and have put off capital spending, waiting for signs the economy is on solid ground—which is happening now. Inventory restocking likely has a way to go too. The uptick in nominal inventories in Q1 ($8.3 billion) is small relative to the reduction during recession (over $120 billion in 2009 alone), so as business activity resumes and firms build instead of deplete inventories, restocking should be a tailwind to GDP. Expanding businesses eventually need to hire—a plus for the already-improving employment picture and, ultimately, consumer spending.

As we've highlighted, firms are already reaping the benefits of a strengthening global economy. Even the slightest revenue growth is a boon to slimmed-down firms' earnings, likely leading to fine times ahead for stocks. But maybe not for pessimists.

 

*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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