The Commerce Department today reported a 5.7% increase in gross domestic product (“GDP”), at an annual rate, during the fourth quarter of 2009 – 5.7%! This exceeded the 4.8% consensus median forecast by close to 20% on a relative basis. It also followed a 2.2% GDP growth rate in the third quarter of 2009. So why is the U.S. stock market barely reacting to this seemingly positive trend? The answer to this question lies in some of the significant data components underlying this most recent GDP report.
As you will see from the chart above, the all-important personal consumption expenditures (“PCE”) figure actually decreased from the previous quarter. In our opinion, if consumers are not spending in a meaningful fashion, the economy cannot continue to grow minus any external stimulus. Further, excluding the change in inventories, GDP would have only grown at about 2.2% (annualized) during the fourth quarter. Hence, while we never want to look past any positive economic data, the most recent GDP data does not, by itself, add any support for the belief that a sustainable economic recovery is developing.
Even with the healthy second half of the year, as measured by the GDP growth rates in the 3rd and 4th quarters of 2009, the U.S. economy still shrank by 2.4% overall in 2009 and unemployment currently stands at over 10%. Until job creation begins to kick-in and consumers, and businesses, start to make more capital outlays, we, at Hennion & Walsh, feel that significant GDP growth in 2010 will be challenging.