Last week revealed two of the sillier aspects of Wall Street’s expectations game: the obsession with parsing words and torturing data. Between the Fed’s mild language change and Friday’s fourth quarter GDP data, we saw fine examples of the maddening illogic that sometimes rules the Street, where “good” can be bad and “bad” can be ok.
Start with the Fed: Their language change suggests to us that they fear one of two different inflations. Either the central bankers believe the economy is entering a period of sustainable expansion, and therefore needs to have growth controlled at a measured, non-inflationary pace. Or, the Fed fears inflating another equity bubble, and are acting early – this time – to prevent further bubble expansion.
Has Greenspan been acting as a counterweight to the unprecedented stimulus of the past 11 months? Exhibit A is the slowing growth of Money Supply. As the nearby chart suggests, the Fed has made a pre-emptive strike since the middle of 2003 to reduce liquidity, albeit from inordinately high levels. One wonders why: As recently as January 28, 2004, the Fed stated they “perceive that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal.” So why then, the big drop in MZM – unless they fear inflation or an asset bubble? (Don’t tell me that its due to a drop in mortgage refinancing — that’s a small percentage of the change in MZM).
With that quandary in mind, shift now your gaze to recent economic numbers, most of which have been coming in below unrealistically high expectations. Fourth Quarter GDP slowed to 4%, from the obviously unsustainable 8.2% pace of Q3 and represented a greater than 50% drop from the prior 3rd Quarter’s growth. For the full year of 2003, GDP expanded by 3.1%.
This yearly data points out how absurd it is to “annualize” quarterly GDP data is. The economy expanded by 2.05% in the 3rd Q, and by 1% in the 4th Q. In most years, this would be considered positive. But with expectations ratcheted up so high, these terrific numbers managed to disappoint the market.
Meanwhile, other numbers are genuinely disappointing. Chicago PMI was positive, but it’s a “gut check survey,” not empirical data. Releases with actual numbers – Durable Goods, Industrial Capital Equipment Spending, Capacity Utilization, Consumer Spending, and Employment, – all were below expectations. This despite the fact that Commerce Department said that ’03 federal spending was +8.7% in the Q3, the highest since +9.9% in 1967.
Despite the cheers of the Bulls, this economy has not demonstrated it is in a self-sustaining recovery – yet.