Friday, April 30, 2010


The Lehmann Letter (SM)

Today the Commerce Department's Bureau of Economic Analysis released its estimate of first-quarter GDP (the nation's output):

The release said:

“Real gross domestic product … increased at an annual rate of 3.2 percent in the first quarter of 2010... In the fourth quarter, real GDP increased 5.6 percent….

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, and nonresidential fixed investment that were partly offset by decreases in state and local government spending and in residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

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 data show an economy that has hit bottom and is slowly climbing out of the trough. The recession is over, but just barely.

Consumption and investment are growing although net exports and government spending are not. Within the investment component, residential and nonresidential construction remained weak. Business purchases of equipment, however, are rebounding strongly. But the reversal of the inventory liquidation continues to be the strongest positive element. Businesses are now rebuilding their stocks of goods rather than disposing of them.

Curiously, despite the federal stimulus, government's contribution remained flat. A slight gain in federal expenditures could not offset a somewhat larger drop in state and local spending.

In sum: Although business expenditures on inventories and equipment are rebounding, gains elsewhere remain slow. A sharp turnaround continues to elude us.

© 2010 Michael B. Lehmann

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