Connect the Dots

Alan Abelson’s UP AND DOWN WALL STREET column today in Barron’s identifies two economic "dots," but stops just short of drawing the line that connects them.

Since his subtle implication may be a bit understated, we decided to get out our pencils and draw that missing line for him:

Dot one: 3.8% GDP

We have a pretty decent economy, at least if we go by the headlines: "3.8% annualized rise in third-quarter GDP, strong corporate earnings and renewed productivity vigor." However, Abelson warns that:

“We’d be loath to bet too heavily on either the economy or the market. For openers, both are likely to feel the drag from higher interest rates, and there’s no reason yet to believe that Mr. Bernanke will be any less resolute in fretting about inflation than Mr. Greenspan. Higher rates are aimed directly at the most inflationary force in the economy — housing. And, already to some effect, as witness the drop in mortgage applications, the build in the number of new but unsold houses, grudging but palpable give in prices and slackening in the growth of sales.

Housing, moreover, has not only been the single most powerful engine for economic growth but it also, thanks to the ease with which homeowners can turn the equity in their homes into cash, has proved a huge boon to consumer spending. Indeed, without that handy pool of dough, Jane and John Q. would be awfully pressed to indulge their boundless appetite for stuff, since their incomes are increasing much less rapidly than their outlays. And absent any savings, the consumer without being able to dip into the equity in his house or leverage its presumed appreciation would have no recourse but — perish the thought! — to cut back.

Even a modest slowdown in consumer spending would have nasty consequences for the economy, and anything more than modest would be all the nastier.

Dot 2:  The state of the US auto industry

El stinko:

The near-lethal combo of surging gasoline prices and plummeting consumer confidence (a 13-year low) did a real number on sales, driving them down to a 14.7 million-unit annual seasonally adjusted rate, from September’s 16.3 million (and July’s steamy 20.7 million). It didn’t help, either, that the companies stopped giving cars away quite as enthusiastically as they had been doing when they were into "incentives."

Incidentally, the weakness in the American Auto industry has been a long time coming: Racer and all around car guy Brock Yates foretold of this in his 1983 book: The Decline and Fall of the American Automobile Industry

Connecting the Dots

I doubt the final read of Q3 GDP —  the prelim number is full of guestimates — will be 3.8%. But Q4 looks to be much worse. We previously mentioned how Uncle Sam’s spending contributed, as well as the GM/Ford giveaway. Let’s take a closer look at those auto sales:


graphic courtesy of WSJ


The trend in auto sales is clearly down. Selling autos at cost "pulled forward" sales from later quarters. Anyone on the fence — buyers, potential buyers, and even marginal prospects — went out and made their purchases.  After you give something away at cost, it is quite difficult to get people to pay full price again.

But this is kinda like reverse channel stuffing. That means that the fourth quarter may see a much weaker GDP — on Auto sales weakness alone. If the real estate refi cashout slows, or the consumer wanes, look out.    




Helluva Suit
Barron’s MONDAY, NOVEMBER 7, 2005

Auto Sales Fell 14% in October, Hit by Higher Gasoline Prices
THE WALL STREET JOURNAL, November 2, 2005; Page A3

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  1. The Prudent Investor commented on Nov 5

    As long as the government component in GDP keeps rising all is fine, isn’t it?
    Any slowdown can simply be prevented by ever more dollars being printed by the Fed, getting borrowed by the Treasury and being spent by the White House, the IOU’s happily pickedf up by foreign central banks.
    How about starting another war?
    The US economy got always lifted out of the doldrums by a war (Korea, Vietnam, Nicaragua, Iraq). As we know from history, economically it makes no difference whether these wars are being lost or won. Kellogg, GE and Halliburton will still see rising revenues.
    For unemployment problems the USA should turn to the European model. Everybody attending a training class (2 hours per week are enough) does not get counted as unemployed. Combine the classes with a free meal and save the budget by cutting unemployment deficits, ah benefits…and all brushes ahead of the flat tax will be cleared.
    Don’t forget to chant “what a wonderful, wonderful world” while enacting these reforms!
    For the auto industry all it needs is more tax breaks. Every SUV that can theoretically be used in the war against terror can be written off as long as the government can seize it when in need (Swiss model).
    No, these ideas are not intended to land me a consultancy job at the CEA. I will get rich by shorting the dollar a little while after the first 50 bp rate hike Ben Bernanke will employ to establish his reputation as an inflation fighter.

  2. collecting wealth commented on Nov 5

    the notion of a down turn has been talked up quite a bit lately. The other day I saw from Mad Money that Cramer was preaching defensive stocks for the upcoming down cycle. If it’s on TV, then it’s probably here

  3. D. commented on Nov 5

    1. It seems to me that inflation is an American problem. I put off so many purchases waiting for the Canadian dollar to strengthen… you should see how cheap everything has become in the last 2 years, apart from housing of course!

    2. 3.8% does not say anything about the quality of that growth. Was that growth a reflection of investments made in the past or a sign of what’s to come in the future? Since we are still witnessing a lack of savings at a time when a large group should be building its nest egg, I say that growth is simply a reflection of what we have been seeing for the last 20 years… Boomers’ coming of age.

    3. Taxes will be going up. Maybe not in a year or two but I am 99.999% sure that they will be going up unless a huge clean-up is done to government or a drastic cut is made to benefits or the social net. A huge amount of Boomers are about to retire with a lack of savings and many houses to offload! And Bush who was promoting his ownership society just a couple weeks ago just came out with a tax change that would cut mortgage interest deductions!

    4. For the next 10 years, Gen-X will be taking over the first group of Boomers toe retire who will probably put their multiple houses for sale as arthritis makes it tough to maintain so much square footage. The only problem is that Gen-X is a very small group, much smaller than boomers and I’m not sure there will be enough youngsters to pick up all the houses that will be put up for sale. It does not help that Gen-X does not have much money!

    5. Starting with the car industry, there’s going to be a real shakeout in pensions and benefits. Imagine the change in spending habits of Americans if a large number of them lose their health coverage and start paying for it out of their own pockets. Or maybe the government will pick up the tab… go back to 3. taxes are going up!

    6. Many of the boomers I know who are about to retire within the next 5 years plan on going from 2 to 1 car. We know where the pent up supply is coming from, where will the pent-up demand come from? Asia? Will Asian countries let the Big 3 take their market share? Mmmm… maybe if we’re reaaaallly nice.

    7. I’ve been reading many articles stipulating that Gen-X and later Gen-Y will be paying for the boomers retirement. Let me tell you, I’m part of Gen-X and if incremental work hours do not pay off, I will not work any more than I have to. If the whole load is put on the younger generation you won’t be fighting Iraq, you’ll be witnessing a huge inter-generational war.

    8. I am probably what you would call a Gloom and Doom person but you are wrong. I think there will be a few shakeouts but I believe we’re going to find solutions to many of our problems. Many people are going to go through the wringer. There is too much money floating around out there with barely any returns. The excess liquidity will vanish. In the meantime, I’m making sure my liquidity does not vanish so I can pick up the pieces before they all fall into place in someone elase’s portfolio.

    And I’m in no rush. Slow and steady wins the race.

  4. nate commented on Nov 5

    do you think change in bankrupty laws is hurting or will have an impact on the economy?

    people may be more hesitant to buy an expensive auto-

  5. cm commented on Nov 5

    D.: “if incremental work hours do not pay off, I will not work any more than I have to”

    And that may be more than anybody would like. Let’s hope not. One question is always, with how many others do you have to compete in the labor market, and how low are they willing to go? When there are enough potential takers, you have little leverage.

  6. Lord commented on Nov 5

    How about starting another war?

    Iran is making a bunch of noises.

    For unemployment problems the USA should turn to the European model.

    The US model works just fine; just don’t count them.

    Taxes will be going up.

    Tax rates will be going up, taxes collections will probably fall.

    I’m not sure there will be enough youngsters to pick up all the houses that will be put up for sale.

    Don’t they still live with their parents?

    I will not work any more than I have to.

    We will just have to make sure you have to then. ;-)

  7. D. commented on Nov 5


    You bring up good points. I guess my point is that I doubt Gen-X will have to pay for it all. I’m really confident the cost will be spread out throughout the entire population. If not, there will be lots of anger. And I don’t think it’s the kind that would be great for productivity

  8. nate commented on Nov 5

    Barron’s had a big article on all the cash.

    Do you have a blog posting on cash at corporations? Did I read at your blog the cash is concentrated in a somewhat small proportion of corporations?

  9. calmo commented on Nov 5

    No mention of the heating oil costs about to be born by all those consumers who were hoping to see big drops in the price at the pump when they decided they couldn’t really afford to pass up those auto incentives this summer.
    This looks right:
    “If the real estate refi cashout slows, or the consumer wanes, look out. ”
    So is that micro-bull market behind us?

  10. critical thought commented on Nov 6

    one quibble. . .

    why does everyone talk about auto sales being “pulled forward”? Does anything else get “pulled forward”? Housing?

    Seems to me that Detroit has had substantial discounts on cars since october 2001. . . if the “pull forward” is now suddenly ending, it’s been one hell of a 4 year run.

    More likely than the “pull forward” theory is simple price – the big 3 can longer get the prices that they used to. That’s it.

  11. Barry Ritholtz commented on Nov 6

    1) There are only so many cars that can be sold domestically in a given year;

    2) While incentives have been going on for years, SELLING AUTOS AT (or near) COST has not. That started this summer — and is now over.

    3) It snot just the big 3 — let BMW or Honda offer temporary steep dicounts for 3 months, and their saless would soar — until the discount ended . . .

  12. naince commented on Nov 17

    Read Jack Traynor’s piece in the Nov/Dec Financial
    Engineering News. Really!

    And bring on Bernake!

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