It is always prudent to look under the hood after a big unexpected beat or miss on a major headline economic number.

Never so relevant than Friday’s GDP report, which blew out expectations, and appears right out of Stranger Things.   The 3.2 print was light years away from the beginning of the year panic when many thought the economy was falling off the cliff.   Declining markets almost always cause traders and investors to “retrofit their perception of the  fundamentals” to the price action – e.g.,  “the market’s going down and we are heading into recession…the yield curve is pancaking and signaling recession….the Fed needs to implement an emergency 50 bps rate cut…”   Yada, yada, yada.

Long live the Flat Yield Curve Society!

Do they not yet understand market prices are so distorted by the market socialism of government and central bank intervention, what many now call “socialism for the rich,” that there are few if any economic signals that can be derived from market prices?   We were having nothing to do with the economic panic, by the way,

We will watch and wait and don’t believe the U.S. is heading into a recession in 2019   – GMM, January 1st

Is The Coast Now Clear?  Bull Markets Forever? 

The coast is clear with the 3.2 percent GDP on Friday, right?  Bull markets forever?

Not so fast.

The number was much weaker than it appeared.

Private domestic demand (also known as real final sales to private domestic purchasers) – personal consumption + nonresidential and residential fixed investment – which is the traditional driver of robust and sustained economic growth contributed less than 35 percent to Friday’s headline growth number.   This was the lowest proportional level since Q4 2009.

The bulk of GDP growth came from the combination of a big inventory build, net exports, and government spending (see table below).   Yuckety, yuck, yuck…

In fact, some see conspiracies,

This stockpiling of goods boosted first-quarter GDP growth by about 70 basis points and helped propel growth to a 3.2% annual rate, well above forecasts.

The problem is that it is not at all obvious where these inventories came from. Goods have to come from somewhere, either produced by domestic firms or imported from abroad.

The mystery is that both production and imports fell in the first three months of the year, according to government data.

“You can’t stockpile what you do not import or do not produce,” said Robert Brusca, chief economist at FAO Economics.

The Fed reported last week that industrial output slipped at a 0.3% annual rate in the first quarter. – Zero Hedge

There have been only five quarters in the past thirty years where private domestic demand contributed so little to GDP growth.

Furthermore, over the past 72 years,  there have been only 15 quarters where personal consumption, business fixed investment and residential had such a small contribution to a 3 percent plus economic growth rate.

Now What?

Hard to say, but we ran the numbers and found that 5 of the 15 quarters after such similar aberrational 3 percent plus growth as was the case in Q1 2019, where private domestic demand’s contribution was so small, experienced negative growth.   Only 3 of the 15 quarters did economic growth accelerate.

The average growth deceleration of this sample was 435 bps quarter on quarter.

Empirical probabilities suggest that Q2 economic growth will be significantly lower than Q1 with the high likelihood of the final reading of growth in the quarter will be lower than the initial print.

Stay tuned.