From Barron's Alan Abelson on GDP:
The big news about the economy came early on Friday, and no less an eminence than Treasury Secretary Paul O'Neill said it spoke for itself. Mr. O'Neill then added, presumably for the benefit of those hearing-impaired or citizens simply unable to make out what the news said, that it was all good. What specifically prompted this official encomium, of course, was the preliminary reading that first-quarter GDP had grown by a 2% annual rate, or twice as fast as the fourth quarter of last year's woefully sluggish pace.
The stock market thoroughly agreed with Mr. O'Neill and posted a quite respectable and fairly inclusive advance, with the bulls proclaiming the end of the recession-that-never-was. Bonds managed to disguise their enthusiasm, as dabblers in such securities, who seem to get their kicks from scary visions of revivified inflation and the like, read all manner of evil consequence into the GDP number.
With all due deference to Mr. O'Neill and the stock market, except compared with 1%, 2% is not exactly robust. Admittedly, our own guess proved slightly off -- we reckoned that the economy had grown, at most, less than 1% -- but that was merely, you understand, the result of a bad forecasting day. Nonetheless, we don't think that the first quarter's performance demonstrates anything except the hazards of predicting.
It surely doesn't banish the specter of recession, much less herald the coming of a new boom. Besides our saturnine bent, that view reflects even a cursory look at the elements that contributed to the better-than-expected GDP growth. The most conspicuous lift came from good old Joe Consumer, who just couldn't resist those markdowns as business slashed inventories with the gusto that springs from desperation.
All told, good old Joe boosted his spending by 3.1%, a cut above the 2.8% in the previous three months. And what he absolutely couldn't pass up was the chance to buy a new car -- or more accurately, a new SUV -- at a knockdown price. A sizable chunk of the outsized rise of 11.9% in consumer spending on durables owed to the zest with which said consumer bought new wheels.
And therein lies the rub. Or one of them, anyway. For as Goldman Sachs pointed out in a dispatch issued on Friday, Detroit is shifting into "park." In a nutshell, analyst Gary Lapidous reported that April auto sales are deteriorating, while light-truck inventory is ballooning, possibly foreshadowing cutbacks in production at Ford and GM. Apart from the likely hit to auto profits and the pall on their stocks (Lapidous downgraded the sector), the gathering clouds over the industry augur ill for one of the two main props to the sagging economy -- housing is, of course, the other -- and, as noted, the source of the big thrust to GDP in the first quarter.
What also appears very much worthy of note in the GDP report was the further decline in our collective savings rate. After spending $74.3 billion more than its disposable income in the first quarter (the comparable gap was $51.6 billion in the fourth quarter of '00), the country saw its personal savings rate fall to a negative 1%. Yes, we're aware that savings don't count anymore because of capital gains. But capital gains, in case you missed it, haven't been so easy to come by lately.
Besides suggesting that we're a nation of grasshoppers, that unsettling savings figure, together with mounting layoffs, the surge in new claims for unemployment insurance to over 400,000, the same level as they were back in the 1990 recession, plus a towering burden of borrowings, preordains a considerably less exuberant consumer in the long months ahead.
Just as industry, wallowing in the aftermath of an unprecedented capital-spending boom gone bust, is not likely to respond to the Fed's serial rate slashing, so the overspent, undersaved and debt-sodden consumer is also apt to prove resistant. As that brief on the auto industry by Goldman points out, in 1990, the Fed's aggressive ratcheting down of rates failed to brake a drop in car sales. We suspect that it'll take more than the old monetary medicine to get folks up and spending again this time around as well. The consumer -- and his confidence -- need time for regrouping, recouping and recharging -- conceivably, a fair stretch of time.
In sum, the GDP surprise was pleasant, but it's not likely to prove a happy harbinger of things to come. And the reports it inspired of the demise of the recession are, shall we say, greatly exaggerated. |
