Barry Ritholtz Squares the Circle on GDP Growth vs. Consumer Spending

The most puzzling element in the recent set of economic releases and revisions on GDP growth is the disconnect between overall growth and consumer spending. The initial release for the first quarter showed GDP growth of 1.3% despite a rise in consumer spending of 3.8%; the revisions released last week reduced GDP growth to a flagging 0.6% yet increased the consumer spending increase to 4.4%

What gives? Ritholtz at Seeking Alpha has the answer:

Here are the facts: The U.S. economy grew last quarter at
the slowest pace in more than four years. The initial GDP report of 1.3% was actually more than double what the updated data showed, and was 25% below economists consensus. Housing, slack capex investment, declining consumer activity all are responsible for part of the slowdown…

Also included in the Commerce Department Data was that consumer spending was revised upward, to 4.4% from 3.8%. Note that if not for this revision, we would be talking about a sub 0% GDP. That would be the first quarter of 2 needed for the official measure of a recession.

How is it possible that consumer spending rose, when 80% of retailers have been missing numbers? Easy: Rising prices (not sales) in food and energy. You know, those elements the Fed hates to measure when it comes to inflation.

How and why most economists think that this is the low point is simply beyond me.

I am kicking myself that I didn’t think of this explanation. But it begs the question as to why the hoards of professional economists and economic forecasters, who are paid to think about this all day, didn’t see through this either. Is it that optimistic interpretations are the only ones they allow themselves?