It was somewhat lost in the shuffle in Wednesday.
Investors were so stunned at Fed Chief Ben Bernanke’s admission that
commodity inflation might accelerate over the next few months before the
Fed is forced to act on interest rates, they missed the part where the
Fed lowered its 2011
GDP
growth estimates from a range between 3.4% — 3.9%
to 3.1%.

For anyone pinning his or her hopes on 3.9%,
that’s got to be disappointing.

But after yesterday’s first read of Q1 2011
GDP growth — a
measly 1.8% — investors are likely to take another look at the total
message delivered by the Fed.

Let’s start with this: the U.S. economy grew 2.9% in 2010.
The Fed currently hopes we get 3.1% growth this year (after all it’s
paying $600 billion to get a little growth). The first quarter isn’t
getting off to a roaring start, despite QE2.

We can certainly look to the budget battle going
on in Congress as a source for some 1Q weakness. Defense spending was
down 11.7%, annualized. Government purchases as a whole were down 5.2%,
following a more modest 1.7% decline in the fourth quarter of
2010.

(As an aside, defense contractor Raytheon
(NYSE:
RTN)
reported a 15% drop in Q1 profits.)

Given the push for austerity in government
spending by Congress, it’s reasonable to expect that government spending
may continue at more depressed levels.

*****Once again, the American consumer did its
part — consumer spending was up 2.7%, after 4% growth in Q4. And the
manufacturing sector has responded — inventory building came in at $43
billion, and represented the full 1% of the 1.8% Q1 growth.

That’s right, without the inventory build, the
economy grew just 0.8%. That, to me, is a real red flag. Because if the
consumer gets skittish, we’ll lose a good portion of both consumer
spending and manufacturing, which are the only real strong points of
growth right now.

And with the Fed looking for inflation to possibly
accelerate, the potential for the consumer to close the old wallet seems
high.

*****I would be remiss if I didn’t mention that
technology spending was another strong point. Spending on equipment and
software rose at an 11% annualized rate. But even in tech there are some
uneven signs.

Microsoft (Nasdaq:MSFT) reported a 4% drop in
Windows sales that is roughly mirrored by a drop in PC sales. Tablet
computers, like Apple’s (Nasdaq:
AAPL) iPad are clearly
cannibalizing laptop PC sales. That’s impacting Microsoft. It’s also
obscuring corporate PC purchases.

Intel’s (Nasdaq:INTC) recent strong earnings
report indicated solid corporate IT spending. But the IDC research firm
is reporting declining PC sales. And Microsoft’s results would seem to
back this up.

******Stocks rose yesterday, and commodities like
gold, silver and oil posted gains as well. But don’t miss the action in
bonds. The iShares Barclays 20+ Year Treasury Bond ETF (TLT) was up
nearly 1%, a clear reaction to the weak Q1
GDP number.

In my opinion, these are the assets to watch right
now. Slowing growth will pressure commodities. Investors have been
immediately focused on the Fed’s comments on inflation, sending silver to
$50 an ounce, for instance. But bonds are a far bigger market. It takes
more money to push bond prices higher.

If investors perceive that the economy is slowing,
bonds will continue to rally. The U.S. dollar will even push higher. Keep
your eyes on commodities and bonds to anticipate the stock market’s next
move.

Published by Wyatt Investment Research at