GDP Report

Yesterday the Department of Commerce reported that GDP grew 3.5% in the latest quarter, after four previous consecutive quarters of contraction. The market cheered the news and the Dow jumped a massive 2%. However, as often happens, the market is not always justified in its reaction to news releases. Iacono Research pointed out that when taking a closer look and disecting the number, it is not very impressive. In fact it is highly deceiving.

Three significant factors- personal consumption, residential construction, and inventory change- comprise the majority of the expansion. We all know how heavily these three factors have depended on government stimulus. The increase in personal consumption was primarily due to the Cash For Clunkers program- something that was a one time short term boost. Residential consutruction is massively subsidized by the government. Considering the success in keeping interest rates low, government tax credits and so on, it is no surprise that this sector also received a boost. Inventory changes too are a short term phenomenon.

So taking these three factors out of the equation would actually turn the 3.5% expansion into a -0.3% contraction. The conclusion is that it would be highly unwise to use yesterday's GDP report as an affirmation of improving future economic prospects.