Comments on the GDP Report

A few comments on Q1 GDP Report

By Spector

The change in private inventories was smaller this quarter - adding 1.7% to GDP in Q1 2010 compared to 4.4% in Q4 2009. It is important to note that the inventory contribution to Q4 GDP was from a slowdown in the liquidation of inventories, but in Q1 businesses were building inventories - and this inventory build will probably slow in Q2.

As I noted earlier, the two leading sectors, residential investment (RI) and personal consumption expenditures (PCE), were mixed. RI declined to a new record low as percent of GDP, however PCE increased at a 3.6% real annualized rate.

The increase in PCE does not seem sustainable unless employment and incomes increase soon. A large portion of the increase in PCE came from a decrease in personal saving.

Click on graph for larger image in new window.

This graph shows personal saving as a percent of disposable personal income.

It is not unusual for the saving rate to decline at the beginning of a recovery as people become more confident. This helps drive consumer spending, but with the high levels of household debt, I expect the saving rate to increase over the rest of the year.

Here are some Q1 numbers (all annualized):

 Personal consumption expenditures (PCE) increased $130.7 billion

 Personal saving declined $88.5 billion.

 Government social benefits to persons increased $61.1 billion.

So the boost in PCE came from the decline in saving and the increase in benefits. That is not sustainable.

The second graph shows real personal income less transfer payments as a percent of the previous peak.

Unlike the recovery in GDP (previous post), real personal income less transfer payments has barely increased and is still 6.6% below the pre-recession level.

The peak of the stimulus spending is in Q2 2010 (right now), and then the stimulus spending starts to taper off in the 2nd half of 2010. So underlying demand better increase soon - and that means jobs and incomes going forward.

Unfortunately residential investment is usually one of the key engines for employment and growth at the beginning of a recovery - and I expect RI to be sluggish all year because of the huge overhang of existing housing units. So my guess is the recovery will probably remain sluggish, and I still expect a slowdown in the 2nd half of 2010.

DOE chart

ECB MAY HAVE TO GO NUCLEAR

Link: ECB May go to Nuclear Option

Home Prices vs. Jobs

Click on image for larger graph 

Case Shiller analysis by Zerohedge

Unadjusted Case-Shiller data for February indicated that on a sequential basis the decline in home prices is accelerating. And this is even with every stimulus imaginable thrown at the problem. We can't wait to see what happens with the latest round of homebuyer subsidies runs out. As the press release states: “Existing and new home sales, inventories and housing starts all show tremendous improvement in their March statistics. The homebuyer tax credit, available until the end of April, is the likely cause for these encouraging numbers and this may also flow through to some of our home price data in the next few months. Amidst all the news, however, we should also pay heed to foreclosure activity, which have reached their highest level in at least the last five years. As these homes are put up for sales, we may see some further dampening in home prices. ”

More on Housing

Prices +0.3% y/y, down 2% m/m...lots of seasonal noise. (Feb.)

But, Rental Vacancies remain elevated, indicating that there are still an excess of 1.7mm units in housing out there...

New Home Inventories Plummet

Months of supply declined to 6.7 in March from 8.6 in February. This is significantly below the all time record of 12.4 months of supply set in January 2009, but still higher than normal.

New home sales are counted when the contract is signed, so this pickup in activity is probably related to the tax credit. Note that that a few thousand extra sales NSA in March