U.S. GDP Falls To 1.1% In 4Q 2005

An article in the Wall Street Journal U.S. GDP Grew at 1.1% Rate As Consumer Outlays Slowed (subscription required) is interesting because of how the news was interpreted by various pundits.

The Commerce Department reported Friday that gross domestic product, the broadest measure of U.S. economic output, rose at a seasonally adjusted 1.1% annual rate in October through December. The gain was slimmer than the third quarter's 4.1% increase, and marked the weakest quarterly showing since the final quarter of 2002, when GDP rose 0.2%. For all of 2005, GDP advanced 3.5%. It grew 4.2% in 2004 and 2.7% in 2003.

"While this was a disappointing report, there are signs of a very sharp rebound in GDP growth in the current quarter," economists at Morgan Stanley wrote in a note. Indeed, they wrote they now see a "very good possibility" the economy will grow at a 5% or better rate in the first quarter of 2006, versus their earlier estimate of 4.2% first-quarter growth.

Various pundits said today's GDP data was good because, with the tepid economic climate, Bernanke would likely stop raising rates soon. That argument seems specious to me. It seems specious because no matter what the GDP figure is, you could create a bull case argument. Poor or low GDP data, Bernanke ceases to raise rates soon. If rates cease, then the markets should continue to go higher. Great or high GDP data, the economy shows strength and robustness in spite of high energy costs and rising interesting rates. The economy is expected to remain strong. Higher profits will continue to fuel markets higher. Indeed, look at the second quoted paragraph, Morgan Stanley believes that there is a very good possibility that the economy will grow at 5% or better.

I believe investors should have stocks that will do well in a bull case and a bear case scenario. A diversified portfolio is the best way to invest.