GDP Report Revised Higher

Today's economic reports offered some positive news that was overshadowed by oil market activity. GDP was revised higher, and despite expectations for this, it's still undeniable good news. Don't hide under your bed, but we think it's probably time to take our bad tasting medicine to avoid the inflation virus.

GDP Report for First Quarter

This morning, first quarter GDP was revised higher to a real growth rate of 0.9%, from the initially reported 0.6% rate. Bloomberg's consensus of economists was already looking for an upward adjustment (+1.0%), so the report was not a surprise. Late arriving data made forecasting a mere matter of plugging in a few new pieces to a puzzle that still needed completion.

Nevertheless, revised higher growth is a clear positive for the economy and the stock market. It's undeniable. Worrywarts will look to Q2, and say, "watch out for that!" But, the fact is that the government has taken aggressive action. So, however late and however at fault they were because of the lack of regulation and supervision in lending, which led to today's troubles, we can't ignore that there are catalysts in existence for the positive.

Greekism:
So, the longer we can survive on fumes, the more likely we are to glide into the gas station just in time to refuel.

Drivers of GDP Adjustment

The economy benefited from dollar weakness. The Fed knows what it's doing, but whether an economic fishtail results is yet to be seen. We wrote an article when we coined the term "economic fishtail"; please go back and reference it for understanding.

The trade deficit narrowed, as import growth softened on lighter general economic demand, and exports strengthened on improved price competitiveness of U.S. goods overseas. Nice tool for now, but inflation risk thrives partly as a result. We could therefore exit this economic scare only to face another, even more frightening global crisis. It's not hidden anymore though, so hopefully global forces will recognize it and act to disrupt that eventuality. Remember, never underestimate human creativity and problem solving skill. Still, I'm not sure I would want to be in the castle with Jean-Claude Trichet, when the peasant unions come looking for him in torchlit chaos at the midnight hour.

Inventory investment was revised lower. "The Greek" regards this factor as a deceptive positive. Private businesses decreased inventories by $14.4 billion in the first quarter, and the benefits of technology and just-in-time processes is ever apparent, and again a driver of our improved economic system. Inventories also decreased by $18.3 billion in the fourth quarter. This allows companies to recover faster, and possibly avoid drastic employment reduction we might have seen in years past. Sure, we have seen layoffs, but nothing like other recessionary periods. And, as long as people are employed, earning income, the economy has better chance of avoiding serious trouble.

Of course, we still remain concerned about spending, and though unrevised, consumer spending still measured at levels last seen in 2001. But, the government has addressed that issue as well, with the tax rebate stimulus.

Medicine That Tastes Bad Often Helps Just the Same

We think it's seriously and critically time to start worrying about inflation, not housing driven recession. It's inflation that poses the clear and present danger today. It's inflation that threatens to take mortgage rates higher, perhaps adding further stress to already overburdened variable rate borrowers who may have difficulty refinancing loans on homes that have dropped in value (lost collateral). But you knew that already...

It's inflation that threatens our budgets, as incomes have difficulty keeping pace with rising food and energy expenditures that are driven not by seasonal factors, but secular ones. The stock market will likely react positively to the end of rate cuts now, and even begin seeking small rate increase. It's the medicine that tastes bad, but helps anyway.

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