Crescenzi: Big Inventory Drag in GDP - TheStreet

Crescenzi: Big Inventory Drag in GDP

The GDP number would have been much higher without the the decline, which bodes well for the future.
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The economy grew at a weaker-than-expected pace in the second quarter, growing at a 1.9% pace instead of the 2.3% pace expected by the consensus. There were also benchmark revisions to past data that put the fourth quarter of 2007 into negative territory (-0.2% instead of the previously reported +0.6%). When combined with today's woeful jobless claims figure, the sense of economic weakness will likely intensify a bit today.

Within today's GDP report, the details paint a picture of weakness, although it is extremely important to note that if not for a massive decline in inventories, GDP would have been reported to have increased at a 3.9% pace. The drop in inventories was the largest since the fourth quarter of 2001 and the third consecutive quarterly decline. The decline is the fifth largest of the past 20 years. This bodes well for future growth.

Still, the stamping of the recession to the fourth quarter of 2007 will create anxiety, despite how obvious it has been that the economy has performed poorly since then. Moreover, most concerns regarding GDP are for the quarters immediately ahead, when the combined impact of many negative forces are expected to exert themselves.

There is at least solace in knowing that inventories, which for decades immensely impacted the ups and downs of the business cycle, are in balance, which will make any recovery happen more quickly.

I believe that in the first quarter of 2009, the U.S. economy will begin to climb back from its worst point, partly because of a likely increase in business and consumer sentiment, which is likely to occur after the nation elects a new president, as it has historically. The second quarter of 2009 could see 4% to 5% growth (as an example of how little it would take, consider that car sales need only rise to a 14 million pace to have its own 4% to 5% gain).

There will be disappointment today in the figure for spending on equipment and software, which fell at a 3.4% pace instead of gaining in the low single-digits, as was expected. The drop was the second in a row. All of the decrease can be attributed, however, to a decrease in spending on transportation equipment, which obviously relates back to the automobile sector.

In contrast, there were increases in spending on technology equipment, with spending up on information processing equipment and software, computers and peripheral equipment, and software.

Personal spending increased at a 1.5% pace, two-tenths of a percentage point less than expected. Spending on services increased at a slow 1.1% pace. This is important given the importance of the service sector to the job market, where service-producing jobs account for more than 80% of all payrolls.

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic,

The Money Market

, first published in 1978 by Marcia Stigum, and

The Strategic Bond Investor

. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback;

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