Gross Domestic Product is a measure of the nation’s economic activity. The statistic measures the sum of the nation’s production for both the private and public sectors. A nation with an increasing GDP in real terms is considered to be growing, while one with a declining GDP in real terms is in recession. (NOTE: By real economists mean adjusted for inflation and population and to be in recession GDP has to decline for at least 2 consecutive quarters).
The BEA put out its revised estimate of 1st quarter 2013 GDP and reports that the overall economy grew by just 1.8 percent, down significantly from its initial estimate of 2.5 percent growth. This reflected downward revisions to exports, and to nonresidential fixed investment suggesting that entrepreneurs has not been as positive as first thought. Growth of just 1.8 percent is at best anemic, especially as it comes off of near zero growth in the 4th quarter of 2012, and considering that population has increased by about 0.7 percent over the period.
In addition, to revising GDP, the BEA put out its preliminary corporate profit estimates for the 1st quarter. In spite of rapid growth in the stock market, these figures were better than the initial estimate by still not great. Overall, profits from current production decreased $28.0 billion (from an earlier estimate of a $43.8 billion decline) in the first quarter, in contrast to an increase of $45.4 billion in the fourth; however, cash-flow was up suggesting additional balance sheet recovery at the corporate level.
Businesses and industries should be concerned about slow GDP growth because the overall level of income available to customers tracks this number. The adjustment to the 1st quarter number was quite large, and reflected reductions in investment and exports as well as consumer spending, all of which are concerning. If the economy continues to grow at little more than the rate of population, overall family incomes – particularly after tax incomes – are going to fall pushing the economy back into recession.
We believe that continued slow growth in the economy will keep the pressure on the Federal Reserve to keep interest rates at ridiculously low levels forcing continued bond purchases on the open market. This should also keep unemployment rates from changing dramatically during 2013 which will keep downward pressure on labor costs. Pressure will continue on the dollar making imports more expensive and helping to stimulate exports to some extent. Overall, the potential for rapid positive changes in the overall economy are not great.