Look Out Above! GDP falls a worse than expected 6.1%

Wait a moment, that is not a typo in the headline. I did not mean, look out below. Let me explain. While the headline figure for first quarter GDP came in worse than economists estimates, the devil is in the details. Lets review the major drains and impact on the headline number released. The big drains on the first quarter reported were business investment down -37.9% annual run rate (-4.7%), inventories declined $103 billion (-2.8%), investment in housing fell 38% annual run(-1.4%) and government spending fell 3.9%(-.08%)

To the positive contributors, Consumer spending +2.2% (+1.5%). Imports declined 34% vs exports declining 30%. Net exports resulted in positive effect of 2% to growth as the trade gap narrowed. Noteworthy, the savings rate rose to 4.2%.

Now why, with a worse than expected headline figure, and some disastrous internals, is the market rallying, and we are hearing a sigh of relief? In my opinion it lies in a few areas, and granted you have to dig for them, but they are there. First the consumption numbers. Consumer spending came in at a much better than anticipated 2.2%. Almost double what analysts had anticipated. This leads to the question of pent up demand. I've talked about this in the past, consumers can and have put off purchases due to fear. Fear of falling home prices, fear of loss of income, etc. As I've stated in the past, this can have a coiled spring effect. Sooner or later, that car may need to be replaced rather than repaired. That roof replaced instead of patched. That copier replaced with one that doesn't drink all your ink and spit out crumbled faded images.

Next the significant draw down in inventories, $103 billion. Continuing a conscious effort by businesses to right size there companies and trim overhead. Inventories are lean and continue to be trimmed by companies to adapt to the current environment. Why is that positive? See the pick up in consumer and business spending. Also, the tax cuts already announced should be getting into consumers pockets and add to this momentum. Worth watching and vitally important for any expectation of an economic correction.

Finally, government spending contracted. WHAT? Government spending falling at a 3.9% annual run rate. I had to say that again. Because that is most likely the last time I'll get a chance to say that for the foreseeable future. Look for the government to ramp up spending in the coming quarters significantly. So, instead of a negative draw of .08% to GDP we should anticipate a very positive contributor to our growth figures. Whether we like it or not.

So, while the headline numbers seem troubling, keep in mind the following. The first quarter is in the rear view mirror. It's history. Also, credit was quite a bit tighter in February vs March and January vs. February. Meaning, the credit market thaw is ongoing. More companies and individuals are gaining access to credit, allowing for big ticket purchases and execution of business plans. Also, should this rebound in consumer spending continue, those depleted inventories will need to be replenished. I would anticipate analysts and economists revising their estimates for second and third quarter GDP over the course of the next few months as we get more supporting data suggesting the worst is behind us.

On a final note, we are in the midst of earnings season which are coming in better than anticipated. Of the companies that have reported thus far, 69% have beaten estimates. It's early, but important. What continues to be of interest is a common theme I've noticed, one of beating on earnings but missing on revenues. How can this be good news? It tells me companies are running lean. It would suggest, should the rebound gain traction, companies that have been most prudent with expenses and head count should see significant expansion in productivity and earnings.

For today, the shorts are nervous and to offer a Martha Stewart, "that's a good thing".