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Warren Buffett nails the problem with the new dismal GDP report

Sam Ro
Managing Editor
Berkshire Hathaway CEO Warren Buffett enjoys a Dairy Queen ice cream bar prior to the Berkshire annual meeting in Omaha, Nebraska in this May 2, 2015 file photo. Buffett's Berkshire Hathaway Inc plans to webcast its annual meeting for the first time, enabling the largest U.S. shareholder gathering to reach a global audience through Yahoo Inc's finance page. REUTERS/Rick Wilking/Files

On Thursday, we learned that US GDP growth slowed to a dismal 0.5% rate in Q1. This was down from the 1.4% rate in Q4.

From the looks of it, economic growth appears to be grinding to a halt.

Ahead of Berkshire Hathaway's annual meeting via a Facebook Live with Yahoo Finance's Ameya Pendse, Fox Business News' Liz Claman asked Warren Buffett about this.

While Buffett acknowledged the report, he offered some perspective.

“It's from quarter to quarter as opposed to year-over-year," Buffett said of the measure. "You take a quarter change and multiply it by four. Now if you’re off by a tenth, that [means you’re off by] four-tenths based on the multiplication.”

In other words, small errors during short periods of time can create huge distortions.

Buffett is famously wary of the noise that comes with any short-term information, whether it comes from the economy or the financial markets. So, his point here is that we should approach the quarterly growth rates with caution and put more weight into longer term measure that smooth out the noise.

“But you don’t see us hitting a recession?” Klaman asked.

“No,” Buffett said. “But we will some day.”

Warren Buffett is optimistic about US GDP

In his annual letter to Berkshire Hathaway shareholders, Buffett took a further step back and considered the US economy.

"American GDP per capita is now about $56,000," he said. "As I mentioned last year that – in real terms – is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well."

Again, Buffett acknowledges that GDP growth is indeed slow. But not something we should be terribly worried about. He used a low 2% rate in his example.

"America’s population is growing about 0.8% per year (.5% from births minus deaths and .3% from net migration)," he continued. "Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding’s effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.) In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation. Were that to be distributed equally, the gain would be $76,000 annually for a family of four."

"Today’s politicians need not shed tears for tomorrow’s children."

Watch Berkshire Hathaway's annual meeting live, exclusively at Yahoo Finance.