Yesterday, real gross domestic product came in positive with an increase of 0.6 % since Q4 2007. This number was regarded as great news, and even by some economist, a proof that the U.S. economy will escape a recession. From Larry Kudlow’s blog there is an amusing post called: Recession? What Recession? with a comment by economist James Pethokoukis, who gives the following analogy, that the American economy is

[...] like the Terminator. Not the Schwarzenegger one—the other one, the Terminator from the second film. You could empty a shotgun—or in this case, an imploding housing market, credit crunch, and high oil prices—into that morphing metal dude, and before you know it, the thing’s all healed and chasing you again.

Even if I love the movie, I don’t think his analogy is the least accurate. If we instead look behind the positive headline number, the Q1 GDP report instead looks quite ugly.

Of personal consumption expenditures (PCE), both durable goods and nondurable goods shows steep declines. While spending on durable goods are in free fall with a negative change of 6.1%, nondurables are also declining, but more modestly by 1.3%. These low readings is a reflection of the deteriorating conditions for the American consumer, commented on earlier, here and here.

But more worrying is the overall decline in gross private domestic investment, that shows negative numbers for all fixed investments, both residential and non residential. Residential investments recorded a change of -26.7 %, which is the highest negative change since the housing bust started to deflate in 2005. A negative reading in non residential investments also indicate that the economic slump is no longer contained to certain sectors of the economy, like housing and construction.

Looking at inventories, compared to Q4 when private inventories subtracted 1.79 % from GDP, inventories acctually added 0.81 % in Q1. This means business increased the amount of inventory from last year. As inventory buildups in a crunching economy, often is a sign of slowing sales, this last change in private inventories are rather an indication of the ongoing liquidation process, from earlier malinvestments. This large inventory buildup in Q1 is also likely going to have a negative affect on production in Q2. Last time we saw a bigger decline in real final sales (GDP less inventories) was in Q3 2001, when we was experienced the tech-boom crises.

What is then positive in the GDP report? Still, spending on services have held up nicely, recording a 3.4% gain in Q1. One contributing factor here was spending on electricity and gas, that increase 14.2% in household operations . The reason for this increase is higher energy prices.

Another positive factor was exports, that increased 5.5 %, compared to imports that only grew 1.4% in Q1. Exports will likely continue to be supportive in the Q2 report.

Finally, even if the often cited: two consecutive quarter with negative growth rule, does not yet indicate a formal recession, we know that all four indicators (inflation adjusted personal income less transfer payments, industrial production, non-farm payrolls, and inflation adjusted factory, wholesale, and retail sales) used by NBER (National Bureau of Economic Research) are set on recession mode.

And, even if the terminator has a tendency of “coming back”, the latest GDP report seem to beg the differ, as it provides a rather gloomy outlook for the U.S. economy.

The second estimate of forth quarter GDP was unchanged for the euro area on +0.4%. A closer look at the numbers show a slightly stronger net export than in the first estimate, with an upward revision for exports of 0.6 % from 0.5% and a downward revision for imports of -0.3 from -0.4.

Even if fourth quarter export growth has slowed compared to the third quarter growth of 2.2%, euro zone exports have held up good, despite the strong euro. This is confirmed by german export numbers published today, that show exports have risen in February by €0.4 billion since January this year.

What is to expect? Surely, it takes time for a move in exchange rates to affect trade volumes, especially if business hedge against the surge in currency. As forward contracts eventually will reset, profit margins will contract in the short term. This will likely result in higher prices as business tries to maintain their margins, which in turn will have a negative effect on overall exports in the euro area. Goods that are sensitive to price changes will naturally experience a significant slow in exports as foreign demand will lessen. For countries, like Germany and Finland, exports may be sticky. With a large amount of non-euro exports consisting of capital goods, both countries could benefit from strong Asian demand.

With euro zone inflation at an all time high of 3.5%(p), many companies have already experienced higher costs, as inflation has affected transportations and overall energy prices, resulting in an increase of input prices. According to the CPI euro annual report for February, transports had increased 5,4 % and energy 10,4% since last year. For the exporting sector of many countries this will surely have a double negative effect, also resulting in slower GDP growth.