Why Q1 GDP was actually really good
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James Castores, welcome back to Seeking Alpha. Always great to talk to you. Thanks for coming on. James writes on Seeking Alpha. You also run an investing group called Successful Portfolio Strategy. Let me ask you, we saw a GDP contraction in Q1. What would you say in terms of bringing that into context and how much that may mean a recession or how much

you're putting on the odds of a recession happening. How else would you contextualize the GDP numbers and maybe the economic data will be seen for the coming months? Well, interestingly, I actually thought that GDP number was really good. I think that anybody that's interpreting that negative GDP number in a negative light isn't really familiar with how these figures work and what these figures actually mean.

The negative GDP number was actually caused by a spike in imports. In other words, there was an increase in imports.

But if you actually think about it, what does it mean for there to be an increase in imports? It just means that there's more demand. In other words, people have money and people decide to spend a lot of that money. And it actually caused imports to rise. But the thing is that in GDP accounts, imports are subtracted from GDP. So it comes in the GDP accounts, this increase in imports, which is actually reflecting an increase in demand,

In other words, U.S. consumers are actually spending more and businesses are spending more. That increase in spending actually gets reflected in a negative way in GDP. And that's actually what...

caused this negative GDP number. So if that hadn't been there, if we actually look at something that's called where we just look at this amount of spending of private entities in the United States and look at the private economy, it actually grew it around 3%. So if we exclude this impact

net exports, and if we exclude government spending, and government spending really shouldn't be sort of taken into account when we're talking about the business cycle, per se, the economy actually grew at something like 3% on an annualized basis for the quarter, which is not a bad performance at all.

Now, let's dig a little deeper into that positive number. Now, some of this positive number was actually caused by people front running tariffs. In other words, there were some people that realized that there might be some tariffs implemented and they decided that they needed to go and purchase some stuff before the tariffs got put into place. And so therefore, the big item of GDP that had a huge growth, we're talking $1

Almost historic levels of growth was in investment and particularly in equipment. On a year-over-year basis or an annualized basis, excuse me, growth in equipment investment increased by 20%.

And some of this has to do with the fact that a lot of equipment and a lot of the components that go into equipment are actually imported, particularly from China. So if you're a business and you're thinking that in the next year, you're going to be making an investment in some equipment, people just decide, you know what, let's pull the trigger right away and buy this equipment now, because if we wait until the second or the third quarter, there's going to be these tariffs. So that actually helped to drive that really good number.

But there's another side of that coin, which is a little bit of bad news, because essentially what that is, is that it's pulling forward demand that would have otherwise been there in the second, third and fourth quarter. So it's kind of robbing Peter to pay Paul. This surge in investment in the first quarter is actually going to probably turn up in the second, third and fourth quarter.

as being reflected in some pretty bad numbers at that time, simply because that demand was brought forward. Now, another aspect of the GEP report that I think is interesting to look at is that consumption slowed pretty significantly. It didn't slow down to like kind of recessionary levels, but it did slow down quite a bit. And that's consistent with some of the survey data that we see in things like the University of Michigan

consumer survey and some of the other consumer surveys that show that U.S. consumers are extremely gloomy right now. In fact, on average, they are about as gloomy as they tend to get during a business cycle recession. So it's not a surprise with the average consumer being pretty pessimistic about the economy that

that they may have slowed down their consumption a bit. So that's maybe a very, very, I'd say, minor canary in the coal mine that we saw in this GDP number where we start to see consumption slowing. Again, it's not at a recessionary level, but we did get a slowdown in consumption. And as we know, consumption is really the lion's share of

But the part of economic growth that actually tends to be the big delta factor when it comes to GDP is actually investment.

And as I pointed out, investment rose spectacularly during the first quarter. But this actually leads to some really big question marks about the possibility that we could actually see a contraction in investment in the second, third and fourth quarter. And whenever we see a big contraction of investment, that's actually when we get a business cycle recession, because business cycle recessions are led by contractions in investment. Consumption follows. Consumption is a lagging indicator. In other words,

Consumers stop consuming as much when the economy is already in bad shape. Whereas business people that make investment decisions, they pull the trigger on their investment consumption decisions a lot more quickly. And so that shows up in the data a little earlier. Don't forget, these episodes will be up with transcriptions at seekingalpha.com slash WSB.

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