Whoopee! The economy is in a strong recovery and all is well with the world. The huge stock market advance of last year is justified after all and it's clear sailing from here on out! Or is it?
The short answer is that we aren't buying what the numbers are selling. Q4 GDP was reported at 5.7% but that number is much less than meets the eye. Inventory build accounted for about 3.7% of that growth and will likely reverse in subsequent quarters given the weak consumption component (the consumer spending growth rate actually declined in the quarter from 2.3% in Q3 to 1.7% in Q4). Approximately 90% of the preliminary GDP number is composed of guesstimates since most of the inputs aren't finalized yet; the government has had a tendency to report overly optimistic initial numbers and then revise down those initial estimates in later quarters... when people aren't paying as much attention. One likely source of a coming downward revision is the trade deficit, which worsened in October and November (December hasn't been reported yet), but, nevertheless, is credited with adding 0.5% to the GDP number in Q4. Other problems with the GDP number were falling imports and declining aggregate private hours worked, which contracted at a 0.5% annual rate. Neither number indicates any kind of strong recovery taking place. All in all, we think the GDP data point toward a slow growth to no growth economy in coming quarters and quite likely an outright resumption of the recession sometime in 2010.
Further evidence that we are heading back into recession in the next few quarters lies with the money supply data. Money supply growth is currently negative as M2 and M3 continue to contract. We have never had an outright contraction in M3 (the broadest measure of money supply) without an accompanying recession! The bottom line for the public is to take the currently reported economic numbers with a HUGE grain of salt, and to act appropriately in positioning their investment portfolios.
