The GDP Report: We, Apparently, Are Not Pleased

I'm not sure I had ever contemplated what the day would look like when 3.1 percent growth was considered bad news, but now I know for sure. From Bloomberg:

The U.S. economy grew at a 3.1 percent annual pace in the first quarter, the slowest in two years, while inflation accelerated. Inventories swelled as consumers and businesses reined in spending, suggesting cutbacks in production may hinder growth this quarter.

An inflation gauge tracked by the Federal Reserve rose the most since late 2001, today's Commerce Department report in Washington showed. The initial estimate of gross domestic product, the total value of goods and services produced, trailed the 3.5 percent median forecast in a Bloomberg News economist survey...

The personal consumption expenditures price index excluding food and energy, a measure tied to consumer spending and watched by Fed officials, rose at a 2.2 percent annual rate last quarter, the fastest since the fourth quarter of 2001. The rate was 1.7 percent in last year's final three months.

That was not the only unpleasant price statistic. From the Wall Street Journal Online:

Inflation gauges in the report were mixed. The chain-weighted GDP price index, a measure of economy-wide inflation, increased at a 3.3% rate -- the fastest since an identical jump in the first quarter of 2001-- after rising 2.3% in the fourth quarter. The price index for personal consumption rose at a 2.1% rate after climbing 2.7% in the fourth quarter. The price index for gross domestic purchases, which measures prices paid by U.S. residents, rose at a 3% rate in the first quarter after advancing 2.9% in the fourth quarter.

That dip in the personal consumption expenditure price index was trumped, of course, by the increase in its ex food and energy version.

The experts did not like.  From the previously cited Bloomberg report:

"The rise in inventories was an especially unwelcome development,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi Ltd. in New York. ``If this inventory is not cleared quickly, it will lead to cutbacks at the factory.''

Ditto, from the Financial Times:

“It is the mix of growth that is the biggest disappointment,” said Paul Ashworth, an analyst at Capital Economics, a consultancy.

“If business investment is slowing, there is nothing to pick up the slack as consumer spending weakens.” A big rise in inventories during the quarter suggested some companies might have been caught by weaker demand, he said.

This comment, which appeared in a report from Reuters...

"The market digested the economic data and wasn't at all pleased that the GDP numbers came in at a lower-than-expected rate," said Gordon Fowler, Jr., chief investment officer at The Glenmede Trust Co. "There's growing concern that this slow patch is going to be longer and deeper than people originally thought, and that's going to have a negative impact on earnings and economic growth over the next few quarters."

... sounded positively cheery compared to this one from another Bloomberg article...

"The market's having trouble with the question of how much the economy is going to slow,'' said Scott Wren, senior equity strategist at A.G. Edwards & Sons Inc. in St. Louis. "The concern is that economic growth is going to collapse.''

... and this one from a Rex Nutting article at MarketWatch:

"Stagflation is rearing its ugly head," said Peter Morici, a business professor at the University of Maryland. "The Fed faces a Hobson's choice: reining in inflation or tolerating unacceptable levels of unemployment."

At least Rex decided to put a little perspective on things:

For all the anxiety, however, growth in the first quarter was still close to or above trend, while inflation remained within the Fed's target. Growth has averaged 3.2% a quarter for the past 20 years...

"There is plenty of strength buried in the details," said Mat Johnson, chief economist for ThinkEquity Partners, noting the 20% growth in investment in information technology. "The pace of consumer spending growth remained high, despite the persistence of high energy prices."

In the same column, Steve Stanley makes the million dollar query:

"The big question is whether the economy is weakening on a trend basis or March was just another one-month soft patch," said Steve Stanley, chief economist for RBS Greenwich Capital, casting his vote for the temporary slowdown scenario.

In response, it is hard (for me) to argue with this analysis, from CBSNEWS.com:

"The problem appears to be the higher energy prices, and if energy prices stay elevated, the economy is going to struggle," Mark Zandi, chief economist of Economy.com told CBS Radio News. "If energy prices moderate, which I think at this point is still the most likely scenario, then the economy should have a reasonably good year."

Also reporting: Kash says "this is not a very good report"'; Barry Ritholz  holds is nose; The Prudent Investor dreads tomorrow.

UPDATE: Kash has an extensive analysis of the inventory data.  Calculated Risk delves into the net export part of the equation.