Insights & Advice

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Egypt Trumps 4Q GDP: Half Empty or Half Full?

Friday’s news that the economy grew by 3.2% in the last quarter of 2010 was greeted with mixed reactions. Clearly, the markets were disappointed, given the sell-off in the averages, but this may only be a temporary set back for investors.

Egyptian riots spook markets

Some economists were disappointed. One camp was hoping to see a lot more growth (closer to 4%). Others pointed out that the quarter’s performance was just a smidgeon below 3.3%, the long term average growth rate of the U.S. economy. At that rate, they argue, it is going to take a long, long time to reduce unemployment in this country.

The report indicated that there was a sharp downturn in imports over exports, acceleration in personal consumer expenditures (PCE) and an upturn in residential fixed income. That sounds pretty good on the surface, especially the part about PCE growing 4.4% in the quarter.

Offsetting these growth factors, were declines in private inventory investment and non-residential fixed investment (in other words, less spending by U.S. corporations). In the case of inventories, the government only provides an estimate of this data because the hard numbers won’t be in for a few more weeks. Finally, federal government spending dropped for the first time in 2010.

Some pessimists point to the pullback in business spending as worrisome, although businesses still spent on equipment and software, home building and commercial construction projects. The drop in government spending could be interpreted as proof that the government’s out of money, especially state and local governments.

I say balderdash! The economy’s performance was in-line with my expectations. The government is not out of money, in fact, the entire cutback in spending was attributed to cutbacks in defense, which is a good thing. Besides, part of the game plan all along was that the government would jump start the economy and then the private sector would run with the ball. That is beginning to happen.

“Although the headline number was not spectacular overall it wasn’t a bad quarter,” says Polina Vlasenko, Research Fellow at the American Institute of Economic Research in Great Barrington, MA.

“The decline in inventories was a good surprise as was the drop in imports. It means economy produced more stuff, which we bought and most of what was sold was made here.”

Friday, I watched as the markets plummeted while gold, silver and oil leaped in price on fears that the riots in Egypt would somehow spark a global conflagration. If you bought into any of that malarkey, you deserve what’s coming to you next week. It just proves once again that, at times, markets are both inefficient and irrational, contrary to what some theorists might propagate.

The real reason for this sell-off is simple. The markets are and have been extended, (overbought) and due for a pullback for weeks. It is just a matter of how deep or long this correction will be. Next week, we will probably see a continuation of selling. If you have any cash to spare, I would use this opportunity to take advantage of lower prices.

Posted in A Few Dollars More, At the Market