The first quarter GDP report was released yesterday, and it wasn’t very pretty. Real GDP, which is the primary measure of overall economic activity, declined at a -6.1% annual pace in the first quarter, which was only minimally better than the -6.3% drop in the fourth quarter. Economists surveyed before the report was released estimated that the decline would be -4.7%, on average, so it was considerably worse than expected. Within the report, private investment and trade were very weak, while personal consumption was surprisingly strong. You have to look back to the early 1980s to find quarterly contractions in GDP of this magnitude.
Although GDP captures a lot of attention, from an investor’s standpoint, the important thing to keep in mind is that GDP is a backward-looking report. By that I mean it reports economic activity that occurred 2-4 months ago (January – March). While we certainly pay attention to GDP, we spend more time focusing on other data that might give an indication of what lies ahead, as opposed to what’s already happened. Lately, a variety of indicators have given the impression that economy is attempting to stabilize, which is the first step in recovery. We don’t expect the economy to begin growing again before the end of the year or possibly even next year, but it seems that the worst of the contraction may have passed.
