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Sharp GDP Revision Won’t Slow Taper Debate 

Kristina Hooper 



Kristina Hooper, head of US investment and client strategies, comments on today's GDP stunner and why it's likely to boost stocks, but have little impact on the unwinding of QE measures.
The US economy grew far less than anticipated in the first quarter of 2013, but it's not likely to sway the Fed's tapering decision.

The final reading of real GDP growth for the first quarter was released this morning, showing an unexpected and significant downward revision. The previous estimate of GDP growth was 2.4%, and economists were expecting 2.5%. However, annualized growth actually came in at only 1.8%.

Personal consumption takes a nosedive

The biggest downward GDP revision was in personal consumption. In particular, spending on services fell to 1.7% from 3.1%. This drop largely reflects expiring payroll-tax cuts, and is consistent with what we've seen in terms of the reduced revolving credit and greater non-revolving credit  trend 

Business investment revised downward

Business investment was also down significantly from the previous estimate, which reflects business uncertainty regarding the fiscal cliff and possible re-regulation. We also saw a concentration of business investment in the fourth quarter, which may have reduced the level of business investment in the first quarter. In this reading, exports posted a decline as opposed to the gain we saw in the second estimate.

Housing recovery remains solid

However, residential investment rose 14% in the first quarter, up from a prior reading of 12.1%, which provides further evidence of a housing recovery. Inflation ticked up slightly, with headline CPI rising to 1.3% from 1.2%. Core inflation, ex-food and energy, was revised upward to 1.7% from 1.6%.

Less growth could boost stocks

A lackluster GDP reading might be a positive for the stock market, given that it points to a weaker economy—and the Fed appears committed to ensuring the economic recovery is on solid footing before it dials down its monetary stimulus. The slight uptick in inflation should not be a cause for concern by the Fed, as inflation expectations have fallen in the last month.

In fact, the Fed’s preferred measure of inflation, the core personal consumption expenditures price index (PCE), is only up 1.1% year-over-year. It has steadily declined this year, continuing its downward trend from 2012. Tame inflation gives the Fed plenty of room to maintain an accommodative monetary policy stance. And it could even delay the tapering of QE if the economy fails to improve or unemployment doesn’t hit the 6.5% target soon enough.

GDP report unlikely to influence Fed debate

In short, this is a snapshot of the first quarter, and the impact of the payroll tax expiry will likely fade in the second quarter, while business investment—as indicated by core capital goods orders—is showing some expansion since May. Our view is that this report will likely have little impact on the Fed's upcoming debate on tapering, as it's fairly stale economic data at this point. The Fed will more likely look to the benchmark revisions released by the Bureau of Economic Analysis next month for a more current view of US economic growth.

The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

Gross domestic product (GDP) is the value of all final goods and services produced in a specific country. It is the broadest measure of economic activity and the principal indicator of economic performance.

The core personal consumption expenditures (PCE) price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends.

Allianz Global Investors Distributors LLC, 1633 Broadway, New York NY, 10019-7585,, 1-800-926-4456.


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