Last week, the first quarter Gross Domestic Product (GDP) data was released, and it was not what we expected. GDP was -1.4%, compared to a forecast of 1.1%. For those unfamiliar with GDP, it is the total market value of all products and services produced by a country. A positive GDP number suggests that a country is producing/growing in some way, whereas a negative number indicates the opposite. By definition, we are in a recession if we have had two quarters of negative GDP. The fact that GDP was negative may appear alarming at first glance, but it is not as bad as it appears.
The Bureau of Economic Analysis (BEA) divides GDP into four categories; consumption, private investment, government spending, and net exports. The chart below shows how much each category contributes to GDP. Net exports (pink bar) was the source of most of the drag, showing that we imported more than we exported. With the assumption of higher interest rates, the dollars’ worth against other currencies has climbed. Furthermore, as the dollar has risen, exports have become more expensive for the rest of the world, resulting in a decrease in demand for our products.
If you take a look at consumption (blue bar), consumers in the U.S have yet to find a reason to cut back on their spending. Consumption is still expanding, and a significant contraction would be required for the U.S. to enter a long-term recession. Furthermore, unemployment is approaching historic lows, and job openings continue to be plentiful. A recession is quite unlikely with such a robust labor market. Finally, if you look at GDP forecasts for the rest of the year – not that forecasts are ever completely accurate – the next three quarters are expected to be greater than the most recent report. As a result, it is expected to improve in the second quarter.
Although headlines can provide a general summary of economic data releases, they can be deceitful at times and are not always as they appear. We continue to invest in high quality companies with solid fundamentals and consistent cash flows, that can withstand the ups and down in the economic cycle. Rest easy that our economy is stronger than headlines suggest, and even if a technical recession were to occur, a prolonged recession is unlikely at this point.
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All charts and data from Bloomberg unless otherwise indicated.
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