The First Quarter of 2014 Grew at a Negative 2.93%

GDP2014Q1

Economists and the media spent most of the day making excuses (e.g. weather) for the final revision to Q1 GDP as “old news”. In fact, some investment banks have already increased their Q2 forecast for GDP because, well, the first quarter was so bad. That’s not a joke; that is the actual rationale. In other words, an increase of $100 billion (for instance) in GDP is a larger percentage of $15.8 trillion (actual SAAR Q1 GDP) as compared with the same $100 billion increase on a $16.1 trillion (consensus estimate for SAAR Q1 GDP at the end of March) economy.

There may very well be a bounce back in Q2 GDP, but let’s not forget about the opportunity cost of a declining economy. Not only did the economy not grow, it lost ground–ground that can only be recovered at some point in the future and must be recovered prior to advancing from the Q4 2013 level. To think of it another way, assuming the next three quarters grow at an Seasonally Adjusted Annual Rate of 3.0% each (which, by the way, hasn’t happened since Q3 2004), the aggregate U.S. GDP increase for 2014 would be under 1.5%. The FOMC currently estimates that 2014 GDP will grow at about 2.2% (see previous post). For a 2.2% aggregate growth rate to occur, the U.S. economy would need to grow at ~4% in each of the next three quarters. That is a tall order in a weak economy.

Financial markets are a tale of two forces: a fragile economy and an expansive monetary policy. QE3 is winding down and should conclude in the fourth quarter of this year, but until then, expect the equity market plateauing to continue.

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