Aurum Wealth Management Blog

What’s the Deal with GDP?

By: Michael McKeown, CFA, CPA

Last week the Bureau of Economic Analysis released the final report for first quarter Gross Domestic Product (GDP), which measures the market value of all final goods and services produced. The result was an annualized negative 2.9% growth rate for the U.S. economy. This was the worst quarterly performance since the first quarter of 2009. Consumption was the only positive contributor with small detractions from fixed investment and government spending. The large detractors were inventory and net trade.

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The simple narrative blamed the weather for the slowdown in consumer spending (which comprises 70% of the economy). Yet slowing spending started in the fourth quarter of 2013, before the polar vortex in January and February. The consumer is running slower than originally estimated at 1% versus the previous estimate of 3%, but not at levels that would indicate recession. This is according to our chart for monthly spending on retail and food services, which adjusts for both population and inflation. Since this is a discretionary category, consumers can quickly cut back on their spending when times begin to toughen up as they did in 2001 and 2007, prior to the last two recessions.

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The unemployment rate continues to trend down (at 6.3% currently), manufacturing durable goods are positive, and surveys such as the ISM (Institute of Supply Management) still show a positive trend. Part of the big detraction was due to inventory, so it seems companies do not want to be caught with an oversupply. We will see payroll data this week for June, but job growth has been steady at an average of just under 200,000 per month for the past two years.

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For now it pays to consider the weak growth from the first quarter as an aberration, however, there are warning clouds brewing. From mid-2012 to early 2014, inflation averaged 1.5%. Earlier this year it dropped to 1% before jumping to 2%. A further increase to 3-4% would be worrisome. Why? Because a small increase in inflation from 2% to say 4% is a doubling of the price level (recall 2011). In a consumption constrained economy, this would take money from discretionary consumer spending to non-discretionary items like gas or food, acting as a tax on the consumer. Many commentators believe that employment markets are tight and sowing the seeds for a cyclical rise in inflation.

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This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

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