Gross Domestic Product, inflation adjusted, was revised downward to show only a 0.6% gain in the first quarter (at an annual rate, compared to the fourth quarter of 2006). That’s a pretty low number (the first estimate was 1.3% gain), but let’s ask: what’s different after this news than before?
The details in the report tell us that inventories dropped, rather than increased, and that we imported more than we had previously thought. The inventory information is actually favorable on a go-forward analysis: we have less stuff on the store shelf and the factory loading dock, so when you spend a dollar on goods, companies will need to produce another dollar’s worth of stuff pretty quickly.
The gain in imports subtracts from GDP (it’s stuff we bought that was not produced here; it was counted in consumer or business or government spending, but we need to pull it out when measuring production in this country). Combine the increase in imports with the upward revisions in consumer spending and we see a decent economy. Also notable: residential construction was even more negative than we previously realized.
Business planning implications: ignore the headline (which is usually good advice). The recent evidence showing accelerating growth is not contradicted by today’s GDP report.
Investment implications: I was about to start bragging about my earlier blog post on investment implications of the consensus economic outlook. Oops. I made notes, but never posted them on the blog. So you have to trust me: I said that consumer spending would be better than current expectations, and that the housing bust would be worse than expectations. When we get a new consensus in a few months, I’ll go over it in detail and post. The key lesson: don’t make investment decisions based on your economic outlook; instead, make them based on how your outlook differs from the consensus.