Smells Like 3% To Me

At the beginning of the year many economists said that economic growth would be weaker in Q1, 2012.  Q4, 2011 GDP came in at 3%, but much of the increase was attributed to a build-up of inventory that was not expected to be repeated the next quarter.  Few other reasons were given for the slowdown.

My expert economic panel forecast Q1 GDP to be 1.9% in January and adjusted it up slightly to 2.1 in the March forecast.  I never really bought into a lower number based on inventory changes alone.  The Q4 inventory build-up was a reaction to inventories being much too low in Q3.  They were too low because sales were much better than expected. (A good thing!).  Then businesses added to stocks in Q4 in anticipation of even higher sales (Another good thing!).  In a growing economy, I do not believe inventory increases are a bad thing, I think it is a good thing.

So if the base is 3% growth, what did the economic indicators say in the recently completed Q1? :

→ The ISM manufacturing index remained in the “growth range” each month and indicated no slowdown in production.

→ The Bloomberg Consumer Comfort Index is currently at its highest since March 2008 (very early in the Great Recession).  The Gallup survey confirms consumer confidence is growing.

→ The Chicago Fed National Activity Index (CFNAI) shows the economy growing at just above a 3% clip.

→ The ECRI Weekly Index (measures leading economic indicators on a weekly basis) is at its highest point since last August.  The government’s index of leading economic indicators also predicts continued growth.

→ Retail sales continued to grow, up 1.1% in February and preliminary March numbers are very positive.

→ Auto sales were described as “robust” by one analyst with sales much higher than last year.

→ Housing probably bottomed out in Q1 (my call).  Regardless, housing is turning from a drag on economic growth to a very small positive. This transition had to help the economy in Q1.

→ The job market keeps growing and the unemployment rate keeps falling.

→ The inventory-to-shipments ratio remained stable through the quarter which means businesses did not over-stock in Q4 and steadier growth has occurred in the last six months.

The Analysis

It is difficult to believe that the economy slowed down at all in Q1.  With all the positive news, you can make a strong argument that it improved over the previous quarter.  However you do have to factor in the negatives of high unemployment, rising gas prices and weak housing data.  Be careful when reading economic commentaries due to the political biases in an election year.  The President’s critics will make things sound worse than they really are and his proponents will spin things the other way.

I’m not an economist, so I am not going to get out my calculator and calculate Q1 inventories.  What I will do is apply what my friend Mark refers to as “Kentucky Windage” and my friend Terry calls “putting his fingers in the air”.  And if I stick my nose in the air, it smells like a Q1 GDP growth rate of 3%.  Which means the economy was somewhat stronger in Q1, with some negative inventory effect.  And while the economy could smell sweeter, it smells much better than the noxious fumes of the last few years.                                                                                      

The Forecast

It did appear that the economy was stronger in January and February than in March.  Last month job growth slowed, the stock market retreated and gas prices rose.  Gas prices will rise more in Q2 due to the switch over to the more expensive summer blends.  If the increase in price follows historical patterns, average gas prices (as reported by the government) will peak around $4.90 a gallon.  I believe this will indeed slow economic grow, but it will not stop it.  Using the same KWM (Kentucky Windage Method), let's shoot for a 2.6% GDP for Q2.

Note: “Kentucky Windage” is a term related to marksmanship, not college basketball.  It is incorrect to say: “Kentucky had much windage at the 2012 NCAA Basketball Tournament.”