Today's GDP numbers should have pushed markets higher -- what happened?
UPDATED with closing numbers at 4:40 p.m.
Fourth-quarter U.S. gross domestic product, released this morning, blew estimates out of the water: the economy grew at a 5.7 annual rate, well above the 4.6 percent rate forecasters predicted.
Yet the stock market had a bad day. For a second straight day, the Nasdaq was in a serious funk, and closed down 1.5 percent. The Dow closed down half of 1 percent and the S&P 500 closed down 1 percent.
What was going on? Doesn't runaway GDP growth matter?
It's a good question: On CBNC this morning, the level-headed Peter Costa, senior managing director at Eckhart and Co., was dumbfounded: What a GDP number like this, Kosta said, the Dow should be up 250 points.
There are a couple of theories, but I think the most likely is that traders don't trust the GDP number or the road ahead. Here's why: The majority of GDP growth in the fourth-quarter came from businesses slowing their inventory reduction. If you take that out, then fourth-quarter GDP rose by only 2 percent.
That's not to say that restocking the shelves is a false GDP. It's not. It means actual manufacturing jobs making actual products that go onto actual store shelves. And that's good. But if that's where it stops, we're in trouble. We need the consumer to pick up the baton and make this a real recovery, and that's what has traders skittish.
About 70 percent of GDP is based on consumer spending. So, great: The warehouses and store shelves are filled with new products. The front door is open. But if no one comes in and buys the products, 5.7 percent GDP will not be maintained.
"Since the boost from inventories is temporary, the GDP data will likely overstate the underlying strength of the recovery," Moody's Economy.com said before the data came out this morning.
What's keeping the underlying economy weak? Unemployment.
Unemployment is still at 10 percent and, given the history of past recoveries, is likely to stay high all the way through the year. I'm guessing that even by the November midterm elections, it will still be above 9 percent. That will stunt consumer spending and keep the recovery sluggish. Further, the four-week moving average for new jobless claims has risen the past two weeks, after falling the previous 19 straight weeks. Some of that may be temporary holiday employment burn-off, but it may not.
And that's probably what traders were thinking today on Wall Street.
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January 29, 2010; 4:40 PM ET
Categories: The Ticker | Tags: GDP, unemployment
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