The domestic economic growth story took a beating in the first quarter of this year with an initial estimate of just a 0.1% annualized growth rate. This smidgen of a growth rate was quickly blamed on the “winter weather” that occurred, ironically, during the winter. Recently received economic data for the first quarter now suggests the growth rate was likely negative.
The good news is that the weakness in Q1 will likely lead to another “inventory restocking” bounce in Q2 just as we have witnessed in each year since the financial crisis. To wit:
“With that inventory restocking cycle now complete, the current “Day After Tomorrow” syndrome will likely lead to another rundown/recovery cycle in the economy. The economic drag caused once again by “Mother Nature” combined with the impact from the onset of the Affordable Care Act is likely to keep economic growth suppressed below expectations once again this year.”
Economic data for April already suggests that this “restocking” cycle is underway. Production is up, but employment demands remain suppressed. This is because business owners are not producing for an increased surge in demand generated by a rapidly strengthening recovery, but rather just replacing drawn down inventories. This was clearly witnessed in the most recent employment report which showed hours worked increasing, but wages remained flat.
This data all suggests that while we will likely see a “pop” in economic activity in the second quarter, it will likely not be more than that. The reason I say this is simply because of the following chart.
One of the key indicators for economic growth, or lack thereof, is the direction of interest rates. When economic activity is truly rising, the demands for credit rise also. The chart above is the spread, or the difference, between the 30-year Treasury and the 10-year Treasury bond rates. When this spread is rising it corresponds with stronger demand for credit and rising economic growth. When the spread falls, it is more coincident with economic weakness.
