Economic Update – Good Headline News But Not Off To The Races

I hope everyone had a wonderful weekend!

Last week ended with some good headline news from the U.S. Bureau of Economic Analysis.  The economy grew at a seasonally adjusted annualized rate of 2.8% after growing 1.8% in Q3 and 1.3% in Q2.  Some news reports were rightly positive, and the probability of a double dip is low.

Unfortunately, however, the data showed a sharp slowdown in real final sales, a significant weakening in government spending and a deceleration in business fixed investment.  The data left U.S annual growth in 2011 at 1.7%.  By Q2 2011, real GDP had reached its prerecession peak, marking a painfully slow recovery that has been insufficient to bring any improvement to the labor market.

Looking forward, we learned that an advance estimate of Q4 2011 GDP came in under 3%, which was below the projections of some economists.  Consumption looks to be a little soft (personal spending has dipped) and a slow down in key services was noteworthy.  Trade also turned down (is a strong dollar good or bad?), government spending was a drag, and equipment investment slowed.

Why all of this detailed data on a Monday Blog?

The stock market has gotten off to a wonderful start to 2012 (gave a little back last week and this morning).  We are encouraged by positive signs that the worst is probably behind us, but we continue to caution that we are not out of the woods yet.  Wall Street analysts are likely to remain positive, but keep in mind that they are often late to revise earnings estimates on the way up and importantly are also late to revise down (more on this in a later post – see McKinsey study in the Idea Flow page for a preview).

In summary, we remain constructive of some risk assets but we are cautious on economic growth in the first half of 2012.  The Fed has has made it clear that they will be very accommodative.  Risks, however, from many external financial factors (Europe is still day to day), slower global growth, and domestic fiscal drag continue to merit attention.

I know we sound like a broken record, but please consider keeping a little powder dry, remain broadly diversified, and invest for your goals (investing should not be a competition).

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