Friday, January 27, 2012


The Lehmann Letter (SM)

The gross domestic product rose by 2.8% in 2011's fourth-quarter according to this morning's Commerce Department bulletin:

That's the best performance of any 2011 quarter, a year in which GDP growth accelerated.

Households purchased more durable goods, such as autos, and homebuilding accelerated. Businesses added to their inventories, but plant and equipment expenditures sagged.

A noteworthy disappointment: Government expenditures lagged. At this point in a weak recovery, government spending should accelerate in order to make up for the slack in private expenditures. Later in the expansion, when private spending recovers, government spending can taper off. But military spending and state and local government spending fell, pulling down the government total. If government spending had risen, GDP growth would have been notably higher.

Nonetheless these numbers are an overall positive sign. The economy shows no sign of falling back into recession, although it will be a long, slow slog back to a conventional notion of prosperity. Unemployment will fall slowly; full employment is still a long way off.

And don't expect further strong gains in corporate earnings. The big bounce back in profits is behind us. Business has boosted its profit margins to record levels. Now sales volume must grow. That will happen, but it will happen slowly.

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© 2012 Michael B. Lehmann

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