Economic growth at the end of 2008 was slightly deceptive.

Brian S. Wesbury – Chief Economist & Robert Stein, CFA – Senior Economist. 2/2/09

Real GDP fell at a 3.8% annual rate, a smaller decline then the consensus expected. However, without an
unwanted accumulation of inventories at businesses, real GDP would have dropped at a steeper 5.1% annual rate.

This surge in inventories, and the reaction of business to it, means another steep drop in real GDP is likely on tap for Q1, as excess stockpiles are reduced. At the same time, the widespread severity of winter
weather this year has likely pulled business activity down
artificially – making the recession look worse. In other
words, lagging economic data about home sales or GDP
from late last year or early this year is not very helpful as a
signal of what growth may be doing in the spring.
As a result, it is even more important to look elsewhere
for early signals of the Fed’s loose monetary policy, which
should generate faster economic growth. Despite continued
problems in financial markets, sensitive commodity and
transportation prices – the seismic indicators of economic
geology – suggest that the economy may be “catching gear.”
For certain, these are very early rumblings. But they are
rumblings nonetheless.
The price of gold has increased about $200 per ounce in
the past 10 weeks. Some argue that this represents a flight to
safety, but Treasury bill, note and bond yields are up
recently, suggesting this may not be the case.
Meanwhile, oil prices bottomed in the mid-$30s and
appear range-bound just above the $40 per barrel price.
Another positive sign is that the Baltic Freight Index, a
measure of international shipping prices, appears to have
bottomed two months ago in early December and is up about
60% since then. This is a small rebound from the massive
94% drop from June to December, but it represents a notable
turning point in direction.
Other key commodity prices, such as copper, nickel and
aluminum have stabilized after bottoming in November. If
“Great Depression II” were truly upon us, these commodities
would not have found a bottom.
During recessions, it is typical for investors to reach a
point where they start to think that “this time around”
monetary policy will not work. The long lags while we wait
for the Fed’s bullets to hit the target cause many to lose faith.
We doubt things are really different this time. Monetary
policy is extremely loose and the seismic drums are
scratching away. Some early warning signals suggest that
despite real GDP weakness, an economic recovery should
start taking hold by mid-year.

Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based
upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This
information does not constitute a solicitation or an offer to buy or sell any security.