Ben Bernanke said yesterday during the press release that real GDP most likely came in a less than 2%. More importantly the Fed revised down GDP growth for the entire year to the lower end of the 3% range. Well, GDP was reported today at 1.8% which was below the 2% consensus. Just as a reminder – the last time we saw GDP growing at this rate was last summer when it came in at 1.7% and we were discussing the possibility of a secondary recession if the Fed did not come in with some sort of additional stimulus. They did, of course, and kept the economy out of a secondary decline but let’s look at the most recent number.
First, the media was quick to make claims that this was just a “soft patch” and that it would soon pass and the economy would pick up because hiring was firming up. With employment growth still running well below levels normally associated with real economic growth and the employment to population ratio running at levels not seen since 1984; this may be more wishful thinking that reality.
The reality is that a 1.8% growth rate is a significant downdraft from the 3.1% rate posted in the 4th Quarter. As stated, this is a level where we are concerned with recessionary declines that “soft patches”.
More importantly, let’s just stop and think about things for just a moment. The Fed just said yesterday that the economy is still so weak that QE needs to remain in place. However, after two full rounds of QE, and literally trillions of dollars thrown at the problem – the best we can muster is a very low, sub-3% annual growth rate over the last 4 quarters.
Inventories, again, accounted for half of the growth in GDP and real final sales, which should normally be north of 4% this far into an economic recovery came in at a stunning 0.8%. This is not exactly strong by any measure. The inventory to sales ratio is not setting up well for the 2nd quarter GDP number either.
Furthermore, while retail sales did come in as expected at 2.7% it was a significant slow down from Q4’s 4% growth rate and, remember, was supported by a payroll tax cut for individuals. Commercial construction, housing and governmental spending, largely defense, were all down including state and local spending. None of this will improve in the immediate future which means that the “soft patch” may be hanging around a lot longer than most economists are expecting, or should I say praying, for.
GDP growth appears to have peaked in Q3 of 2010 and the current economic expansion, which has been almost entirely supported by Federal Reserve support and Governmental interventions may be at their nadir of being able to continue pushing the economy along. If Q3 was the peak in growth then it will have turned out that this is lowest high recorded in the post-WWII era as shown in the attached chart.
To put all of this into perspective – after several trillion dollars of injections into the economy, an economy now of the brink of a debt wall, the economy recorded a 1.8% growth rate seven quarters after the end of the recession. What is normal for the seventh quarter of an economic recovery is that GDP is closer to 4.1% growth, employment is strongly rising, spending is strong with real final sales north of 4% and credit is moving through the system. Not this time – and that is because the policies that have caused a mirage of growth have all been artificial in nature. The consumer is still in a recession, along with small business, and the flow of money and credit through the system is almost non-existent. As speculative fueled averages hit new recovery highs, thanks to “Uncle Ben’s” money machine – main street is breaking down and becoming a legion of homeless wretches plugging the streets looking for additional government handouts.