http://zerohedge.blogspot.com/2009/04/spin-on-6-gdp.

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Wednesday, April 29, 2009 The Spin On -6% GDP
Posted by Tyler Durden at 1:02 PM
More sanity from David Rosenberg:

We have to keep an open mind and respect Mr. Market

There is an old adage that a market which does not respond bearishly
to bearish news is clearly not a market in a bear phase. As financial
economists, we have to keep an open mind and respect the verdict that
is being turned in by Mr. Market as he continues to shrug off weak
data and embrace whatever sprinkle of good news that can be gleaned
from the incoming data releases.

Worst back-to-back GDP performance in 50 years

Indeed, the vast majority of economic data remain very soft even if
treated by investors at this point as old news. Not only did 1Q real
GDP contract sharply -- at a 6.1% annual rate versus consensus
expectations of -4.6%, it followed on the heels of a 6.3% decline in
the fourth quarter of 2008. That marks the worst back-to-back
performance in 50 years.

A few reasons that the stock market is rallying on this news

1) The second derivative can only get better from here

The market believes that the back-to-back declines of 6%+ in real GDP
is a cathartic event and that the 'second derivative' (i.e. change in
the rate of growth) can only get better from here.

2) Investors like the knife companies took to inventories

Inventories were cut by $103.7B in 1Q and accounted for nearly half of

the decline in real GDP last quarter. While demand was also soft, the
view is that we entered the second quarter with an inventory/sales
ratio that was quite a bit lower than many forecasts, including ours,
and as such we should see a much 'less negative' 2Q print on real GDP.
It is hard to argue with that point, and again, this is a market
willing to trade off of 'second derivatives' in the economic data.

3) Government spending contraction, a one-off event

Government spending also contracted, mostly on defense, which

subtracted 0.4 percentage points off of the headline GDP number.
Again, a market that has been very selective in its interpretation of
the data is viewing this drag as a one-off nonrecurring event.

4) Upside surprise to consumer spending

If there was an upside surprise in the data, it was consumer spending,

which managed to post a 2.2% annualized advance. Many pundits are
pointing to this as a sign of stabilization in the most critical
segment of domestic demand. Then again, we know from the monthly
retail sales data that the bulk of this first quarter growth took hold
in January, which followed a record 30% annualized plunge as 2008 drew
to a close.
We advise investors to view consumer rebound as a blip.

While most of the post-Lehman collapse in spending, output and credit

supply is behind us, we would advise investors to view the consumer
rebound in 1Q as 'noise' or a blip in what is still very likely going
to be a secular (multi-year) downtrend. The process of liquidating
debt and rebuilding depleted baby-boomer savings is barely one-third
over (with a savings rate of barely more than 4% from 0.2% a year
ago.).

Difficult to see recession ending anytime soon

So, we view the recovery in consumer spending that has the bulls
rather excited as temporary and as we said, mostly reflecting a bounce
in January. What we see in the data supporting the consumer in 1Q was
a $193 billion (annualized) decline in tax payments by the household
sector. Meanwhile, organic personal income (excl government benefits)
contracted at a 5.9% annual rate (-$154 bln). In the absence of a
recovery in wage and salary income, we think it will be very difficult
to paint a picture of the recession coming to an end anytime soon.

Nominal GDP declines at a 3.5% annual rate

We must admit to being surprised at the bond market reaction as the

yield on the 10-year note retests critical support around the 3% area,
especially with NOMINAL GDP, which has the highest correlation with
interest rates, in contraction phase. Nominal GDP declined at a 3.5%
annual rate on top of a 5.8% slide in the fourth quarter of last year.
This back-to-back slide dragged the year-on-year trend to -0.5% from
+1.2% in 4Q and +4.7% a year ago.

As for equities, a client made a very key point to us this morning in

the aftermath of the data. The left side of the V does not surprise
anyone anymore -- it's a done deal. What investors will have to see
for this market to reverse course is that the right side of the V will
prove elusive and end up looking like an L, an elongated U or a series
of W's.