GDP down, spending up

Advance Gross Domestic Product , the broadest measure of economic output, fell at an annualized rate of 6.1% in 1Q, much worse than the Bloomberg forecast of a 4.7% decline, and only slightly better than the 6.3% decline in 4Q. The measure is the first reading on economic activity in 1Q, and is likely to be revised in future readings. Personal consumption rose 2.2%, much better than the 0.9% expected rise, after declining 4.3% in 4Q. Personal consumption spending was led by a 9.4% jump in durable goods purchases. GDP was negatively impacted by a drop in exports and business investment spending, which fell 30% and 37.9%, respectively. Real final sales, which exclude the 2.8% impact from a decline in inventories, fell 3.4%.

Pricing pressures gained steam, with the GDP Price Index rising 2.9%, compared to a gain of 0.5% in 4Q and the forecast of 1.8%. The core PCE Index, which excludes food and energy, rose 1.5%, just above the estimate of 1.3%, and the rate sits between the Fed's implied target of 1-2%. Treasuries remain higher after showing little reaction to the data.

Despite the worse-than-expected decline, the market is taking solace in the report, due to the 2.2% rise in spending by consumers, who represent nearly 70% of GDP. Negative impacts of falling inventory (down 2.8%) and government spending (down 4.0%) are expected to be reversed in the future, as the fiscal stimulus kicks in and low stocks of inventories combined with increasing demand imply the need to rebuild inventory in the future. There is some question as to whether the resumption in consumer spending is sustainable in light of high consumer debt levels, and whether the 1Q spending was a temporary blip that resulted from having a few extra dollars in consumer wallets. As Schwab's Chief Investment Strategist Liz Ann Sonders, and Director of Market and Sector Analysis, Brad Sorensen, CFA, discuss in their latest Schwab Market Perspective: Do Tough Earnings = Higher Market?, when the crisis took another leg down following the Lehman Brothers bankruptcy last September, consumers went into hibernation and corporations began destocking inventory to align with falling sales. However, the steep fall in spending and manufacturing was so dramatic that it simply could not be sustained and some pent-up demand built up. In 2009, consumers have benefitted from mortgage refinancing, a decrease in gasoline prices versus a year ago, and tax refunds now up 17% from 2008. However, the economy is still contracting and it is probable that the path to recovery will not come in a straight line. Read more on their market perspective at www.schwab.com/marketinsight.

[via Schwab]

[4/28/09] The Consumer Confidence Index rose from an upwardly revised 26.9 in March to 39.2 in April, well above the estimate of 29.9. Along with the improved overall reading, consumer confidence about the present situation and expectations for the next six months improved. The report suggests the recent signs of life in the economy and the preceding rally in equities may be beginning to repair some of the damage in confidence that stemmed from the sharp deterioration in the employment picture and destruction of consumer net worth via the collapse in housing and the severe drop in equity prices in the past two years. However, Schwab's Chief Investment Strategist Liz Ann Sonders, and Director of Market and Sector Analysis, Brad Sorensen, CFA, caution in their latest Schwab Market Perspective: Do Tough Earnings = Higher Market?, the excess supply of homes available for sale will continue to pressure prices, and we expect prices to fall another 10%-15% before finding stability. However, sales typically turn before prices, and once home sales begin to rise, that could boost confidence and get others off the sidelines.