April 30, 2001

More Reasons To Doubt GDP

On Friday, we warned that the better-than-expected GDP numbers will likely falter in the coming months in the face of softening consumer demand caused by numerous layoffs and rising oil prices.

A closer look at the numbers suggests that there are even more reasons for next quarter's GDP to show a marked decline. First, the trade deficit had less of an impact on the GDP than in recent quarters. Until recently, the trade deficit was ballooning seemingly out-of-control causing the GDP to look more negative. Now, the trade deficit has been reduced slightly. This decrease was caused predominantly by less consumer demand for imported products. And just as consumer demand for imported products has declined, the demand for domestic products will also begin to soften in the next quarter.

Second, the government pumped up spending in the first quarter, contributing to an increase in GDP. But, this traditionally has been a volatile number, and may continue into next quarter.

Lastly, business investment in new equipment and software continues to weaken. Combine this with lower consumer spending far from showing improvement, and the economy continues on the road to recession. t a profit. If they're not able to show investors a marked improvement and promises of a quick turnaround, stocks are still going to suffer.

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