GDP Growth Augurs Poorly for a Robust Recovery

Q3 GDP Growth has been revised. Originally thought to be 3.5% it was reduced Tuesday morning to 2.8%.

This is dreadful.

We have emerged from a recession that might well have been the worst of the post World War 2 era. And growth is not much below trend, which is generally considered to be about 3.1%.

So why are we disappointed?

Because growth coming out of a recession tends to be like a stock exploding from a base as it embarks upon a fresh leg higher. Readings of 5%, 6% or higher for at least a couple quarters are not uncommon. Coming out of the recession on growth that is already below trend augurs poorly for the prospects of this recovery.

A good part of the performance could well be attributable to the ephemeral effects of the stimulus bill passed by Congress earlier this year. We might be registering positive GDP growth before we otherwise would and there exists the possibility that we could get a true break out quarter in the coming months.

But the economic tea leaves aren’t pointing in that direction. Instead we are left with a recovery far more fragile than we have seen in the past. While stocks have enjoyed quite a run in anticipation of recovery, at some point the market might well express its disappointment. We cannot say we haven’t been warned.