A Possible Crest in GDP Declines

We just got our first look at the Q1-2009 GDP.  The initial report shows -6.1%, much worse than expected but not as bad as the -6.3% in Q4-2008.  Bloomberg had estimates at -5.0% for the quarter and Dow Jones had estimates at -4.6%.  This marks the third consecutive GDP decline, and sets the stage for a confirmation in even the worst ‘formal’ recession since before World War II.  This looks horrible on the surface, but there is a reason it has not killed futures.

Part of the drop was from added inventory pressures as business chose not to restock falling inventory levels.  While there were actually some inflationary fears, this might at least keep the deflation-watch camp at bay.  The silver lining is that deflation fears will not be present, and when businesses do spend we could start to see a substantial recovery merely from the restocking of inventories even if the demand is relatively low.

To highlight how bad some of the areas are, there was a 37.9% drop in business spending, and structure investment was down by 44.2%.  Software and equipment was down 33.8% and total business outlays were down 21.7%.  The real final sales that takes out private inventories fell by 3.4% on an annual rate.

Here is the biggest negative when you consider what we have been hearing from the government in its expansive actions, which are now just supposed expansive actions.  Government spending fell 4% at the federal level.  State and local government spending was down 3.9%.

As a reminder, this is the first look and the number will get two more revisions.  The numbers might actually be worse, and they might not be quite as bad.  Nero is in the streets, but the city has already been burned on many occasions.

JON C. OGG