Tearing the U.S. GDP Number Apart: The Real Picture

U.S. TreasuriesU.S. gross domestic product (GDP) growth in the first quarter of 2012 came in at 2.2%, down from the three-percent GDP growth of the fourth quarter of 2011 (source: Bureau of Economic Analysis). Economists had expected first-quarter GDP growth of 2.2%, so the numbers disappointed. But, in all reality, 2.2% GDP growth is good considering the state of other economies around the world: Europe and the U.K. are officially in a recession, while China is slowing considerably.

After two consecutive monthly declines, real disposable personal income in the U.S. (removes taxes and inflation from income to provide a better gauge of a consumer’s real purchasing power) increased by a mere 0.2% last month.

So, if consumer spending makes up 70% of U.S. GDP, and there has been no real growth in personal income, how did GDP grow 2.2% in the first quarter of this year? The answer: Consumers dipped into their savings, sending the savings rate to the lowest level since before the crisis, in 2007.

There was no strong income growth to justify consumer confidence and GDP growth; consumers dipped into their savings. I doubt consumers can keep tapping their savings for the remainder of the year to keep GDP growing.


The news gets worse. Business investment in infrastructure spending actually declined in the first quarter. So we have the consumer getting into more debt and the job creation engine of business not investing in infrastructure, which means little chance of job creation in future quarters.

“Everything’s fine with the U.S. economy and GDP growth,” is what one would believe reading the mainstream media. Be very careful, dear reader.

A total of 0.6% of the 2.2% GDP growth in the first quarter came from inventory building. This number was surprisingly high considering how inventory build-up made the fourth-quarter GDP growth numbers look stronger than they actually were.

The shelves are full of inventory, but consumers are very indebted and real disposable income is declining, which means consumer confidence will not materialize. The only hope was to create more jobs, but business investment fell in the first quarter.

Obviously, U.S. GDP growth in the first quarter outperformed that of many countries around the world, especially considering the fact that the U.K. and many countries in Europe are already back in recession. However, once the U.S. GDP growth figures are looked at closely, there really is nothing to smile or cheer about.

We are far from out of the woods with the U.S. economy. Again, many European countries are back in recession. China’s economy is slowing quickly. It will not take much for the U.S.’s already weak GDP numbers to collapse…putting us back into recession much faster than most people think possible. (See: U.S. Durable Orders Post Biggest Drop in Three Years.)

Michael’s Personal Notes:

Some are arguing that the U.S. housing market has bottomed.

U.S. homeownership fell to 65.4% in the first quarter of 2012 (source: Bloomberg, April 30, 2012). Homeownership of 65.4% means that of all the occupied housing units in the U.S. housing market, 65.4% were occupied by the actual owner. This is down from the record 69.2%, which was set at the height of the housing market bubble in 2004.

The 65.4% U.S. homeownership level is also the lowest seen in 15 years!

I believe the homeownership rate will continue to drop in the coming years. As I’ve written in these pages, more people are deciding to rent instead of buy in the U.S. housing market.

The main reasons for renting are that banks are not lending out to people. Mortgages are hard to get. Secondly, real disposable incomes are not rising at all for people to justify entering the housing market—the average American is not feeling wealthy; they feel they are just getting by. A third reason is that the record $1.0-trillion in student loans will restrict many first-time home buyers from getting a mortgage, because they already have too much debt.

Another good reason people are deciding to rent: like the stock market, after people have been burned or have family members and friends that have been burned by stocks, one tends to stay away from the stock market in general. The housing market is no different, especially after the horrible collapse of 2007 and the lingering pain many are still feeling today.

The Mortgage Bankers Association (MBA) released its latest housing market report for the fourth quarter of 2011. Its survey covers almost 44 million homes in the U.S. housing market (33% of all homes in the U.S., which is why I believe it is a dependable survey).

The MBA rated all mortgages in the U.S. for delinquency, which means that payments from homeowners are at least 30 days past due. The delinquency rate in the housing market fell to 7.6%, well below the highest level reached in 2010, 10.2%. But these numbers are still dangerously high. After recessions and in an economic recovery, this figure should be half that.

The foreclosures rate in the U.S. still remains very high, as confirmed by RealtyTrac, which estimates the numbers of homes in foreclosure at 5.6 million. As I’ve been writing in these pages, home foreclosures should continue to rise in 2012.

This means that more empty homes will enter the housing market, further putting pressure on home prices. CoreLogic released its “Real House Price” Index for February 2012, which adjusts for inflation. Home prices in February of 2012 are now back to levels last seen in the housing market in May 1999. Case-Shiller’s “Real House Price” Index adjusted for inflation in March of 2012—for its 20-city composite—and is back to levels not seen in the housing market since the fourth quarter of 1998.

The ideas that the housing market has bottomed and foreclosures are a thing of the past are simple fallacies.

Where the Market Stands; Where it’s Headed:

Let’s face the facts: there is a lot of money in the financial system (thank you, Federal Reserve); 10-year U.S. Treasuries continue to yield less than two percent; and the stock market is one of the most attractive places for an investor to park his/her money.

But we must not forget that the stock market trades at a multiple of company earnings. My argument is that the economy will not get better and that it will weaken. As the economy weakens, corporate profits will fall. A policy of keeping interest rates so low for so long, coupled with $2.0 trillion in money printing, make for very inflationary factors. Inflation goes up, interest rates rise, the stock market plummets. That’s how it’s always worked. (See: Getting Ready for the Next Economic War: Interest Rates.)

We are getting close to the top of a bear market rally in stocks that started in March of 2009.

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: The lower interest rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in PROFIT CONFIDENTIAL, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.