Big Misses in GDP? Here’s Why the Market isn’t Spooked

In shock of the year (OK, not really), GDP was barely positive in the first quarter; up only 0.1% with weather taking the primary blame.

Of course this faltering growth rate was completely missed by every single economist out there as their expectations of 1.2% were only slightly off (sarcasm intended).

Hey, at least it is still growth, right?

Wait, It Gets Worse

The following day, Thursday, 5/1 it was reported March’s construction spending actually came in worse than expected at only 0.2% growth.  This compares to the assumed 0.5% rate.

This also means the initial 1Q GDP of 0.1% also is certain to be too high.  Estimates from the big banks are already being updated to a range of (-0.1%) to (-0.4%) negative growth.

Also, let’s not forget about the little anomaly called the Affordable Care Act.

What did not get a lot of airtime was the fact that healthcare spending was a full 1.1% of first quarter’s GDP growth, meaning if you backed out Obamacare spending (or it did not occur), GDP likely would have come in nearer (-1.0%) in the first place.

Two quarters in a row of declining GDP growth is what constitutes an official recession, and the U.S. thought it had just narrowly avoided the first half of such a potential.

With construction’s miss, it is almost certain GDP will be adjusted downward and thus into recession territory when the first round of official revisions come out on 5/29.

Does GDP or any Economic Stat Matter?

John Williams over at makes the convincing case that the U.S. is already in a full blown recession and has been since 2004 as his chart below illustrates.

The U.S. official GDP shows in red that annual GDP has been growing since 2009 per our government’s measurements.

Watch: How we used sentiment to grab a 60% gain in gold

But John’s analysis suggests if you adjust GDP for the real annual inflation numbers (much higher) and back out all the changes to the calculations that have been altered through the years (for example the change in the calculation of intangibles that occurred in 2013), then GDP shown by the blue line has actually been declining for 10 years now.  Translation: we have in reality been in a recession for 10 years!

Another alternative measure of inflation has been calculated by Ed Butowsky and agrees that the low official inflation rate is bogus.  His Chapwood Index suggests inflation is around 10%/year for each of the last 3 years in the major metropolitan areas of the United States, obviously much greater than assumed CPI (NYSEARCA:TIP).

Of the top 40 most populated cities, he says Colorado Springs in 2013 had the lowest year over year real inflation change at “just” 6.5%.  The highest rates of inflation for the top 40 largest cities were typically in California at 12%+.

All this really just shows is that fundamentals are not driving the market, because even a huge GDP downside surprise, and now a negative print, barely made the markets (NYSEARCA:SSO) blink.

If John and Ed are right about inflation, then GDP likely has been declining and we have been in a recession for 10 years, yet the equity markets (NYSEARCA:SPHB) are still making new all time highs.

So much for fundamentals and economics driving share prices!

The fundamentals (NYSEARCA:FNDX) keep deteriorating but the market (NYSEARCA:SCHV) shrugs it off.  This of course won’t last forever, but in the meantime investors need other tools to help evaluate and stay ahead of the markets (NYSEARCA:AGQ).

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