The GDP data released this week showed that during the first quarter of the year, the economy was growing, or really contracting, at a pace of -1.4%. This number measures total output of Q122 compared to total output in Q421. On an annual basis, however, the economy did grow +3.6% in the first quarter of this year compared to the first quarter of last year.
A quick look at the components of the -1.4%:
- Personal consumption: +2.7%
- Goods -0.1%
- Services +4.3% – this is the part we want to see bouncing back as the impact of the pandemic recedes
- Gross private investment: +2.3%
- Government spending/investment: -2.7%
- The Net Exports category was negative. We imported a lot more than we exported. This tells us that the American consumer is still alive and well and the global consumer is not demanding as many US goods. This could be because of the stronger dollar or weaker consumer demand overall abroad (likely both). This detracts from GDP. If we spend a lot on foreign goods and our imports exceed our exports, this is a negative contribution to GDP.
- Exports: -5.9%
- Imports: +17.7%
- Base effects (the term du jour) in business inventories also contributed to the negative number. During the 4th quarter of last year, inventories rose by the largest amount on record. This is because companies had experienced such persistent shortages that they over-ordered, not wanting to be without inventory in this hot economy. Inventories also rose a lot in the first quarter of this year, but not by as much as in Q4; and GDP only measures the rate of change in this quarter over last quarter. The rate of change was negative, which contributed to a negative top line GDP number.
Overall, the negative GDP number was unexpected, but when we look under the hood, is not too concerning. I think most people would agree that falling government spending is not especially worrisome, and the bright spot is still consumer spending and business spending.
Economists are looking for +3.6% in GDP growth for Q2, but we won’t get that until the last week of July. While it’s likely that we are in the late stage of the business cycle, this stage can last for years, so it’s not prudent to try to time the market in any environment. The late stage also brings more volatility, since there is more inherent uncertainty as the Federal Reserve starts to tighten monetary policy. Having said that, markets go up and down and back up, and the most important thing to stay focused on is the financial plan – what long-term return (and associated risk) is required for clients to meet their goals? Over the long-term, we remain confident that despite the climbs and drawdowns in the markets, stock and bond portfolios will deliver returns that meet these objectives.