Merk Investments: Q1'08 GDP Lackluster (April)
Growth in the first quarter of 2008 expanded at a rate of 0.9%, up from the initial estimate of 0.6% due to an upward revision in non-residential construction and net exports. Personal consumption did not see an upward revision and expenditures on services provided the most anemic rate of growth in overall individual consumption since the 2001 recession. Expenditures on durables fell -6.2% and non-durables at a rate of -0.3%. Gross private investment declined -6.5% on the back of a -25.5 drop in residential investment. The only real bright spot in the investment category was the 1.1% increase in structures. Expenditures on equipment and software fell -0.9%.
The data confirmed our expectation of a fall in final sales to domestic purchasers, which declined -0.1%. Stripping out the still robust demand from the external sector and on observes an economy in contraction. In our estimation, this does confirm that the economy declined into a mild recession in the first quarter of 2008.
About the only net positive that one can take away from the preliminary estimate of output for the first three months of the year is that the change in inventories that had been the primary catalyst for the slow growth in the final quarter of 2007, saw a correction and should take a further inventory inspired correction in the data going forward to Q2’08. With this off the table and the rebate checks having begun arriving in the middle of the second quarter of the year, growth is now looking to arrive with a 2.0 handle with the arrival of the June data still in front of us. While we still do think that there are some serious problems in consumption ahead of us, particularly in Q4’08 due to the strong headwinds of rising commodity and food prices, the combination of the fiscal stimulus and past monetary policy should provide a sub-trend, but not disastrous period of growth through the middle of the year. The market has wisely turned its focus on the inflationary aspects of the accommodative monetary policy necessary to stem the credit crisis and we expect this to drive much market activity and Fed talk going forward through the end of the year.
Jobless Claims To 372K
Initial claims for the week ending May 24 rose to 372K, slightly above market expectations of a 370K print. The four week moving average moved to 370K and continuing claims, which are released with a one week lag advanced to 3.104mln for the final week of the sampling period tracking the rate of unemployment for the month of May. For the past several weeks, we have made the case that the market, in particular treasuries, have become quite sensitive to the rising rate of unemployment signaled by the continuing claims data. This data supports our forecast of unemployment continuing its long and steady march upward to 5.5% by the end of the year, with risk to the upside.
Five months into the economic slowdown, firms have been quite restrained in their hiring and have not engaged in massive cuts, but rather have attempted to limit hiring and reduce labor costs through attrition rather than outright massive firings. This has mitigated the damage in the labor market in response to the credit crises and reduction in aggregate demand. However, should economic conditions deteriorate due to the sharp costs in production and general rise in the price of commodities, we could see an equally sharp move up in the rate of unemployment above 6.0% in early 2009.
Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy
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