Are U.S. GDP Growth Estimates Still Too High?

shipping yards, u.s. gdp growthChristine Lagarde, Managing Director of the International Monetary Fund (IMF), made headlines recently by joining the chorus of analysts that have reduced the rosy outlook for the U.S. economy in 2014. The IMF reduced its U.S. GDP growth estimate to 2%, down from a 2.8% prediction as recently as April.

Economists started the year predicting that that U.S. GDP would grow at a 3-3.5% annual rate. And they have been wrong.  Way wrong.  Consensus opinion continues to be too bullish on 2014’s U.S. growth prospects.

Recent revisions to 1st quarter GDP growth resulted in negative growth. In other words, during the first quarter of 2014, the U.S. economy (as measured by GDP) shrank. Remember, the definition of a recession is two quarters of contracting GDP. I’m not predicting a recession in the U.S., but I am pointing out that the consensus U.S. GDP growth estimates are still too high.

Lagarde said that the economy’s contraction in the first quarter was due to harsh winter weather that led to a drawdown in inventories, slower demand and a sluggish housing market.The IMF’s forecast comes on the heels of the World Bank also reducing its 2014 growth forecast for the U.S. from 2.8% to 2.1%, with most other analysts also announcing less promising numbers and revising estimates made as recently as May.

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In short, every analyst worth his business card has been scrambling to rein in previously rosy predictions about our country’s economic growth this year. It’s amazing to see the stampede in the other direction, but if you have read my views, you know that I never joined the crowd that predicted robust growth this year.

The IMF’s new U.S. GDP growth estimate came along with a prediction that the Federal Reserve may leave interest rates near zero for longer than expected. “Policy rates could afford to stay at zero for longer than the mid-2015 date currently foreseen by markets,” according to a statement in the fund’s annual assessment of the U.S. economy.

At least the IMF has finally reduced its U.S. GDP targets for 2014 and has admitted that the Federal Reserve may have to continue its low interest rate policy longer than expected—exactly what I have been saying for several months now.

What should investors do? First, recognize that the recent all-time highs in the various U.S. stock market indexes are coming amidst decreasing volume. In healthy bull markets, the volume should be above average on up downs and below average on down days.  That is not what we have experienced the last several weeks.

Instead, we have been seeing lower than average volume on the up days and above average volume on down days—something I believe signals internal weakness. I continue to favor select bond-oriented investments, REITS and commodity-oriented stocks that should do well in an inflationary environment.

Follow Jeff on Twitter: @JeffVoudrie

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.