GDP Revision not really good news

by Wayne Ferbert on November 29th, 2012

Being market investors, we track corporate earnings like hawks. We know that the companies we invest in are only worth some discount of their future cash flows. Those future cash flows come from positive earnings.

When you hear that GDP was revised upward for 3rd quarter 2012 to 2.7% from 2% you start to get optimistic about economic expansion - and what that expansion could do for earnings. But then, you read the details behind the numbers and they remind you that the softness we saw in corporate earnings in Q3 was real - and might have legs.

On the surface, a 0.7% revision upward is a sizeable revision - and 2.7% starts to get close to that 3% number that starts to make us feel good about our economy.

But the only way to really feel good about a strong GDP growth number is if the private sector is driving it. This last quarter, that was not the case.

The revisions show that the GDP growth came mostly from inventory growth in businesses, trade improvements, and a lift in Defense spending - which is likely a one-time occurrence. 

The private sector was not encouraging. Investment and capital spending by businesses were both negative in the quarter and revised downwards again. Spending on equipment and software as revised downward to -2.7% from basically no growth. Business investment in capital goods declined to -2.2% from -1.3%.

On top of that, consumer spending was revised down to +1.4% from +2.0%. 

All in all, the numbers are not encouraging. If businesses don't invest now, growth is harder to achieve in future quarters. This ship can still get its bearings - but this revision is no reason to think the ship is anything but adrift. 

I know I finish a lot of articles like this: more good reason to be hedged. The uncertainty around forward economic expansion is still high - yet as my partner wrote in yesterday's post, the cost to hedge is still in very reasonable levels - even lower than it usually is.

Posted in not categorized    Tagged with no tags


Leave a Comment