The headline number miss of yesterday’s Durable Goods number got some people worried about GDP today. Following May’s 2.3% decrease, Durable Goods headline number of 1.4% for June was below the 1.6% consensus.
The real concern was not the actual miss, but the below the headline data on Business CapEx. You know, the business spending that a parade of pundits has assured everyone will rescue 2H. It was also soft, falling 0.7%, on top of May’s 1.5%. The silver lining was that unfilled orders — a sign of future demand — rose 1.5%.
GDP consensus for today is 3.4%. As I noted prior, I think that is high. A 2.5 – 2.75% more accurately reflects the actual state of the economy. We have lumpy and uneven growth, as we tack to catch the wind from global growth.
However, at 8:30am, we could see somewhat of a GDP pop (3 – 3.25%) if companies spent much more rebuilding their inventories over the past quarter.
My issue with that is the direct contradiction to the just-in-time mantra we have heard from so many smart people. (See this Barron’s interview with Larry Haverty, Gabelli Global Multimedia Trust on the difference between Modern versus ’60s or ’70s Style Recession).
Recessions have now been banished, given that companies can control their inventories so well. The Demand side of the equation no longer matters, apparently. (Although that begs the question as to why they would need to rebuild inventories over a quarter).
It is apparent to anyone paying attention that Housing remains a huge drag on GDP, and as we saw last month, retail sales are softening. Like Retail, whatever GDP number comes out today, it will be in part the beneficiary of Food and Energy inflation, which does not get properly accounted for in the GDP price deflator.
UPDATE: July 27, 2008 11:55am
Tim has an excellent breakdown of how the various components contributed to GDP:
I have a lingering suspicion the GDP number will hit the acceptable range and then the great game of Clue will begin to figure where the boost came from.
There are two basic reasons for inventory growth: expected demand increase or unexpected demand weakness. The data so far does not support the first reason.
During slowdowns, business will generally build inventories before cutting production; once inventories saturate, production is cut; if the production cut is deep enough and long enough, layoffs occur.
Looking forward, a substantial growth in inventories during quarter two would not bode well for production in quarters three and four.
It just makes me laugh that when GDP comes in low everybody says “forget about it, it’s old news” and when it comes in strong they say, “look at that strength and reacceleration.”
The same load of propaganda was given during the first dot.com boom, and then CISCO among others, despite promises by its CEO that this could not happen due to JIT processes, suffered very much from overordering and overstocking.
Note that the propaganda about JIT making inventory reduction recessions less likely fails to take into account that it is not overstocking but overordering that is the bigger problem, and companies still need to forecast demand and order ahead accordingly, and that is a highly ”political” estimate.
Also, less hysteresis in the stocking cycle may make recession worse, not better, as demand reductions can feed through more quickly.
Overall while JIT has had some impact on lagginess I doubt that has a great impact on the *amplitude* of the business cycle.
Barry,
The Commerce Dept should release two versions of the GDP report. One for the bulls and one for the bears.
That way everybody will be happy and no one will get their feels hurt.
I surmise that this relatively “hot” GDP number takes rate cuts off the table for the foreseeable future.
Looks like Mr. Ponzi has become the protagonist of Catch-22.
I love how we went from a slower to slowing GDP, not a slowdown mind you……all the way to the other side to growth. We never had any neutrality or consolidation. Just slow”ish” to growth.
Did anyone have the stomach to watch the four stooges this morning???
after the first 20 minutes of the bull-fest that BR was on last night I declined.
That was sure a waste of time…..can I get my 20 minutes back?
Ciao
MS
Is this recent GDP reading the initial, revision, or final?
Anyone else have a nagging feeling that Bush’s clip on CNBC about the economy this morning was a bit too reminiscent of the “heck of a job Brownie” moment?
GDP Revised Down for Last Three Years
The economy grew at a 3.4% in the second quarter, in line with economists’ expectations, but growth was slower than previously estimated in each of the last three years, the Bureau of Economic Analysis said.
The changes lowered the average annual growth of real GDP to 3.2% from 2004 to 2006, 0.3 percentage point less than the earlier figures. The 2006 growth rate was revised down 0.4 percentage point to 2.9%, driven by downward revisions to investory investment, personal consumption expenditures for durable goods, state and local government spending and exports. The rate in 2005 fell to 3.1% from 3.2%, and the 2004 rate dropped to 3.6% from 3.9%
The BEA’s annual revisions are made each July to incorporate new and more comprehensive data. The downward revision to spending could add some doubts to already softer numbers from the latest report. Real personal consumption expenditures increased 1.3% in the second quarter, down from a 3.7% increase in the first quarter. Durable goods were up 1.6% vs. 8.8% in the first quarter, while nondurable goods dropped 0.8% compared to an earlier increase of 3%.
Anyone else have a nagging feeling that Bush’s clip on CNBC about the economy this morning was a bit too reminiscent of the “heck of a job Brownie” moment?
you noticed that too eh? that would be a big yes.
a good post on the GDP from another site.
The headline GDP growth was pretty good, 3.4%, but you don’t to dig deep to see the sharp deterioration in numbers.
We need to concentrate just on two series: personal consumption expenditures and nonresidential structures investments:
I 06 II 06 III 06 IV 06 I 07 II 07
Personal consumption 4.4 2.4 2.8 3.9 3.7 1.3
Structures 15.0 16.4 10.8 7.4 6.4 22.1
Most of the GDP components are either coincident or irrelevant indicators, except those two above.
The personal consumption is the leading indicator, because, as shown in the “Ahead of the curve” book, it leads the chain of events in the cycle and is pretty good in predicting the bear stock markets. As you can see the consumer is struggling, which spells trouble in the nearest future.
In opposite, the non-residential capital expenditures, especially in structures, is strictly trailing indicator, meaning it usually peaks when the economy is very close to recession, sometimes it even peaks during recession. The reason is, the decisions to invest into new production facilities are usually made at the top of the economic cycle. The completion takes from 10 to 30 months, so it is pretty typical to see new factories and office buildings to be opened during early recession months. So the 22% increase in structures are, actually, bad news
The economy is clearly heading into recession and today GDP release is a good confirmation
Stuart, Good analysis!
I agee that the consumer is really having a hard time keeping up. Food and energy prices have doubled in 18 months time. These are the two most unavoidable areas (along with insurance which has also seen a steep run up) the consumer faces. Almost $4 milk, $3.00+ gas and nowhere to hide. Going out to eat has gotten more and more expensive, along with taking the family the the theater ($8 – $9 bucks per ticket + $6.00 per bucket popcorn.). No wonder why Companies and their CEO’s are doing really well. However, Corporate coffers are going to dry up because while all these price increases have hit the consumer, they have been getting 3-4% raises (if they were lucky enough to keep their jobs due to low wage workers in developing nations taking them). Companies are just flat out not wanting to pay up for skills/resources they need and are making people work 50, 60, 70 hours a week instead of hiring new (needed) workers. This will all end very badly at some point. My guess is not now because profits are so, so strong, but within the next couple years there will be a bloodbath and we will all be voting for a new 3rd party – the Socialists – to get us out of the mess the greedy corporations/CEO’s have made.
second that shawn……
BTW here’s what is really going on on Wall Street, not the concern for credit or shrinking debt market. This is really the issue:
http://www.thestreet.com/s/wall-street-bonuses-in-peril
/newsanalysis/businessinsurance/10370534.html?puc=_dm
“You do not understand the wife expects, no demands, a new mercedes every year”
Ciao
MS
MS, eesh, now that’s cynical!
anyone has any idea why the Plunge Protection Team is not able to prevent this plunge?
does that mean money printing machine has a limitation?
Great update of the chart. So as personal consumption has slowed it becomes less relevant for GDP. Nice…….”we’re only going to look here this Q”
It may be seasonally adjusted but for who’s “season”…..there are some correlations but it’s just a mis-mash it seems. Unless I am missing something…If I am please enlighten
BTW-techy….they are working on it…pull up the SPY chart and follow along, 5 minute
Ciao
MS
MS…so when will it stop (PPT intervention in the free market, by using the printing press)?
will they stop only when the value of dollar is reduced to nothing (good for us though, all the debt is owned by foreigners..)
i wonder what will be the effect of inflation induced by commodities and imports.I feel that we can easily cut down our consumptions of imports (i can live without buying another pair of jeans, i have enough cloth to last 3-4 years), but what about imported commodities??
techy, MS,
Here’s what I’ve been kicking around: Could it be that the PPT is only effective as long as they have “followers”? If the PPT is the Treasury, Fed and the giant Wall Street banks, that is certainly a lot of resources with which to influence markets. However there are other big players as well (hedge funds etc.). Most of the time, they may know what the PPT is up to and happily go along for the ride. At some point though, do conditions become worrisome enough that they essentially say to Hank and Ben “hey, do what you want with the taxpayer’s money. We’re going to protect ours”?
think of the PPT as fuel for an engine. The engine normally runs on petrol but from time to time a sharp addition of nitrous oxide gives it a kick up in performance.
It does have to have cooperation and when the old adage of a “rising tide lifts all boats” is used you can see how easy it is for that engine to run pretty hot on just a small amount of additional help. Anyone who knows engines also knows that nitrous only works until the engine can’t take it anymore and seizes up.
It got help on Weds. straight from Hank himself to the tune of $16.5 Billion…that’s not counting the regular help it gets from the Fed in form of repo’s
I also think the PPT is used just as much to create and sustain a rally then to protect it from a crash. All the signs are there and have been there for quite some time.
But others need more convincing……just like the Fed needs more data to ascertain if inflation is contained or not.
Ciao
MS
when the majority of credit creation takes place through nonbank banks, other financial intermediaries, and has globalized, the Fed’s actual ability to control is highly diminished even though belief in its power may remain.
IOW, the Fed has relatively much less power than a decade ago, a decline having to to with some of its own early 1990s actions + new technologies + the now long term, progressively deeper multinational deregulating/liberalizing of finance.
As Dizard put it in his FT column –
[…]
While most of the section was taken up with a description of just how the Fed has been improving on its Dynamic Stochastic General Equilibrium models, the key point was in two sentences. Those models, which had been used to justify and tune the tightening monetary policy, are, Mr Bernanke said, “unlikely to displace expert judgment”. The DSGE has to be combined with “anecdotal” and “extra-model information”, along with that expert judgment.
In other words, the models aren’t our models any more. I think that’s a welcome recognition of the reality that the DSGE isn’t computing.
[…]
The problem that the Fed, and the other central banks face is that the lending officers and credit committees at the banks aren’t, in many cases, there any more. Which means giving them free money, so to speak, in a crisis won’t work so well. The classic banking mechanism has been replaced…
[…]
Of course, the Fed staff and management know this. But they don’t know enough to oversee the new processes.”
Fine, its understandable that there be some desire for a ‘controlling authority’ but an attempt to grasp present realities calls for consideration of uncontrollability.