A few thoughts on GDP

Today's revision to the first quarter GDP report didn't contain any new news. The stock market is still (uncomfortably for many who worry that falls typically follow rises) near its all-time highs, both nominally and in real terms, and Treasury yields are still close to their all-time lows. It's a mixed bag, full of worry and caution.

The relatively small decline in first quarter GDP is hardly more than a blip on the long-term chart (above).

 Over the past two years, GDP has grown at an annualized pace of about 2.4%, which is the same rate of growth that has prevailed for the duration of the current expansion. Nothing has changed. The real yield on 5-yr TIPS is priced to continued weak economic growth.

Weak quarters happen every now and then. They don't necessarily precede recessions, nor do they make recessions more likely. It's quite likely that growth will bounce back in the current quarter—such are the vagaries of GDP accounting.

After-tax corporate profits continue to grow, and they remain very strong relative to GDP. Yet PE ratios are only moderately above their long-term average. This suggests the market is still very skeptical that profits can continue to rise.

Both the National Income and Products Accounts and the reported earnings of the S&P 500 appear to be growing at about the same pace. By both measures, profits are at an all-time high.

Using NIPA after-tax corporate profits as the "E" and the S&P 500 index as the "P", PE ratios are moderately above their long-term average. Nothing unusual at all about this. The market was quite exuberant in 2000 by this measure, but is still relatively cautious today—considering how strong profits are relative to GDP.

Blogging may be light for the next week or so, as we are embarking on a trip to Italy in a few hours.