Farrell: Don't Despair!

Fourth quarter GDP was announced as a negative 3.8% the other day, but it's going to get revised downward, maybe more than once.

The trade numbers came out the other day and our exports fell more than expected. When preliminary GDP is issued there is a guesstimate for lots of things and when those lots of things are finalized updates with the new info are issued. With exports falling as much as they did figure Q4 GDP will be revised down by at least a half a percentage point. Some economists are jumping ahead and estimating it will be even worse. Round off all the numbers and say Q4 will be off 5% or more when all is said and done.

Q1 will be worse.

The savings rate this time last year was almost zero and rose to 3.6% in December. The average savings rate since whenever has been 7% and I think we will get there (or higher) quickly. If savings rises to 5% in Q1 that will impact GDP by about 3.5% (since the consumer is around 70% of activity.) That's not exact but certainly close enough for government work. Inventories built in Q4 because sales fell so fast production cuts lagged. So inventories will be "liquidated" in the first quarter and some of the down 5% to down 6% GDP estimates will prove directionally correct.

But don't despair !

The stock market has historically bottomed five months before the economy bottoms. The stock market is a superb discounting mechanism and will figure out the turn long before it is apparent in the numbers. The market also bottoms about seven months before peak unemployment. Unemployment peaked at 10.8% in November of 1982, but the market had bottomed the prior summer. The news is going to stay bad, maybe very bad, for some months. That doesn't mean we can't be in a bottoming process now. The closer we get to the November 2008 lows the more nervous we will be.

But I remain hopeful those lows will mark a bottom and we will test those several more times in the months ahead, but we will pass the test.