I find it amazing that the economic slow down — obvious not just in hind sight, but for the past 6 months (at least) — has finally grabbed the attention of Wall Street.
Not that you could tell from yestersday’s market, but who am I to question the perversity of the crowd? As mentioned previously, we are in a "bad news is good news" phase.
Anyway, check out where the economy softened in the very ugly chart below:
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Consumer spending dropped over 70%, and Business investment dropped nearly as much. Home building cut in half. A huge buildup in inventories versus a prior drop. The trade deficit got much worse. Even Uncle Sam sepnt less.
Occasional Fed conduit Greg Ip notes the details in the WSJ: "Economic growth slowed to its most sluggish pace in three years at the end of last year as consumers and businesses applied the brakes to spending. While a rebound is likely in the current quarter, the expansion after two brisk years appears to be moderating as higher energy prices and interest rates begin to bite.
The nation’s gross domestic product, or total output of goods and services, grew at just a 1.1% annual rate in the fourth quarter, the Commerce Department said Friday. That’s the slowest rate since the fourth quarter of 2002 and well below the average 4.1% growth of the prior 10 quarters.
The principal cause was a slowdown in growth of consumer spending to a four-year low of 1.1%. Other sectors softened, too. Business investment grew just 2.8%, less than a third of the prevailing rate in the prior 2½ years. Residential housing construction grew 3.5%, the slowest pace in a year. And the trade deficit widened sharply, damping domestic production. Federal defense spending dropped, too."
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How is it that Federal spending slowed? Aren’t we helicopter dropping cash into New Orleans? (oh, wait — that’s for deflation).
The sunshine crowd pointed to four factors that are likely to reverse in Q1:
1) Emergy imports replacing Gulf of Mexico production
2) Consumer spending growth slowed during the quarter mostly because of weak automobile sales.
3) Federal defense outlays fell because of the late signing of the defense appropriations bill, and Pentagon spending will likely rebound.
4) Business investment was held back by a drop in transportation-equipment purchases.
I guess they are about half right. I certainly do not expect a consumer spending resurgence — that’s just wishful thinking in my book after the mediocre holiday season; And the crew that touted Q3 Capex Spending as the start of a new run of corporate spending, is deathly silent on the Q4 Capex dearth. The Q4 Capex makes that one strong quarter look like an aberration. We’ll see if it resumes anywhere near Q3 strength in Q1.
The dismal scientists expect growth to (mostly) recover in the first quarter: "Indeed, initial claims for unemployment insurance have been trending lower, leading some analysts to predict that job growth will top a hefty 250,000 in January."
Puh-leeze. Need I have to remind you how utterly awful this crowd has been at guess-timating job creation?
Later in the article, the Ipster gets into some harsh specifics:
"Yet the U.S. may be settling into a period of growth that is slower than in the past couple of years — not unusual for an economy four years into an expansion. To absorb last year’s jump in natural gas and gasoline prices, consumers may have to restrain other spending. The Federal Reserve’s steady increases in short-term interest rates may finally be having an effect on borrowing and spending. Auto makers are more reluctant to offer cut-rate financing. And while long-term mortgage rates haven’t risen in the past two years, increasingly popular adjustable-rate mortgages, tied to short-term rates, have.
The GDP report also found that inflation crept up. The price index of consumer expenditures, excluding food and energy, the Fed’s preferred inflation measure, advanced at a 2.2% annual rate, up from 1.4% in the third quarter, putting it around the top of incoming Fed chairman Ben Bernanke’s comfort zone of 1% to 2%.
The Fed is expected to raise its target for short-term interest rate to 4.5% on Tuesday from 4.25%. Markets and economists are divided on whether it will raise the rate again on March 28 to 4.75%.
Consumers did spend more than they earned in the fourth quarter, producing a negative saving rate for the third consecutive quarter and a negative rate for the year as a whole for the first time since 1947, when records of such data began. But the rate improved in the fourth quarter to minus 0.4%, from minus 1.8% in the third quarter."
Why the rally, if things look that sour? The assumption is that this bad news is good, because the Fed will end its tightening cycle. Then all we have to worry about is everything else, and a slowing economy. (Whoopee!)
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Source:
Economic Growth Slowed to 1.1% In Fourth Quarter
GDP Is Likely to Rebound, But Many Say Expansion Will Moderate This Year
By GREG IP
THE WALL STREET JOURNAL, January 28, 2006; Page A1
http://online.wsj.com/article/SB113836607293558161.html
+250k jobs in January? Have they looked at the historical effect of the birth/death adjustment for January? Its by far the most negative monthly adjustment, generally adjusting downwards by over 200k jobs. This economy will have to be very strong just to overcome the adjustment. I’ll take the under.
wow. nice chart. on the face of it, next Q GDP shd be even worse given that inventory build. business obviously misjudged consumer demand. man, that is ugly
I’ve been bullish, but it does seem that the speculation is increasing rapidly. One coworker said he wants to get a slingbox so he can watch CNBC at work and catch Mad Money to catch those stocks that go up 10-20% after being Booyahed. This as the GDP seems to have slowed, the Fed may stop for fear of going too far, etc.
Definitely time to think about ratcheting down the beta.
Britain is ahead of the US in their financial cycle by about a year. After a severe slowdown in their housing boom and the rest of their economy, long term interest rates are falling and the bondholders are jumping for joy. Is this a prelude to what’s going to happen here? And if so, then what? More of the same as the last 4 years starting in 2007?
That report was just plain ugly. It can be spun any way possible. This economy has taken more shocks than I’ve seen in a long time and the fact that it is still growing….er….not really given the build in inventories is the only reason GDP was not negative….is amazing.
That said, it appears there are some anomalies which will likely result in an upward revision to GDP.
I worked at GM in college and have many family members/friends who work at the Big Three. Whether white collar or blue collar, I am quite confident hundreds of thousands of auto employees, hundreds of thousands of supplier employees and upwards of millions of others indirectly related to the auto industry have just gone into financial hibernation. I don’t know what the true facts are but I’ve seen anywhere from 10 to 50 jobs are directly tied to each auto industry job. Even the large midwestern banks are panicked.
With the anticipated layoffs/crisis in long term uncertainty those people have effectively fallen out of the discretionary spending queue. That’s millions of of consumers. It’s not just bankruptcy concerns it’s a fear that a way of life is over for whole communities. And, based on my unscientific poll of those I know, I’d say it’s pretty factual. That is likely why the midwest saw home activity fall off of the cliff, -25%, whereas the bubble coast have held up well. ie, I don’t think the housing bubble has materialized so much as the uncertainty/crisis in the auto sector is pushing a 300lb weight on the economy’s chest. (So goes GM so goes the economy. It’s different this time? Not likely.) Add in Katrina, oil, inflation, the war, interest rate increases, minimum credit card payment increases, the ongoing fear of terrorism, Iran, concern over pensions, Social Security and government debt and you have one hell of a foundation for a Fear Factor episode. What would really be pretty is if GM defaults on $350 billion in debt.
I am confident there are serious behind the scenes discussions between the auto industry and Washington. Bush would not say that he hadn’t talked to Waggoner. Only that there were no discussions of a bail out. GM has $19 billion in cash and just sucked down $5 billion this quarter. They likely need $12 billion entering bankruptcy to weather a reorganization from what I’ve seen the experts speculate.
I wonder if this is why the Fed started such massive moves in the repo market in 4Q. Those injections were highly correlated to the market run in October and January. I saw some good work years ago where Fed activity in the repo market can have a large impact on short term market moves. It also jives with the recent action in the platinum/gold ratio and copper’s move. ie, Reflation. Future economic activity is blurry at best. 4Q GDP is awful but global liquidity is strong, money is cheap, the copper economy is booming and platinum is on fire again. The platinum/gold ratio & copper is telling me strong growth ahead. Surely doesn’t jive with the GDP numbers. Or, at least not yet. Blow offs? While the bulls appear to be in total control today, this situation could be the perfect storm. Too much greed and a recursive panic if the market buying dries up and a crisis emerges. I’m not predicting because it’s outside of the bell curve but……..
I tend to think Bernanke might get his indoctrination soon enough. I’d bet my life the Fed ain’t pausing either. Well….maybe a pizza. Just a hunch but I think there is some stink in the system we don’t yet know about. My bet is GM. If so, the Fed will need to be a stoic beacon. My bet is Bernanke comes through with flying colors if a situation does come to pass.
Excellent analysis Barry, once again.
Personally, I think we are already in a recession. If inflation was calculated correctly, than everyone on wall street to main street would be aware of the reality. One thing to keep in mind is the money supply figured. The Fed could print enough money to keep the market near or above the ensuing strongly negative economic tides.
It was what, 2 months, between Greenspan’s arrival and the big stock market crash of ’87? I’d be very surprised if Bernanke didn’t have some similar scenario to cope with in his first few months as well.
>> Why the rally, if things look that sour? The assumption is that this bad news is good, because the Fed will end its tightening cycle.
Well looking at the Euro/USD trading on Friday you have to assume the FED will continue tightening way above 4.75%, which was already priced in the exchange rate.
But if we go to 5.00% or even higher I just can’t see the indexes climbing further. I’m a daytrader, so I don’t care if we go up or down, but I sure like to see the indexes go in sync with my perception of the economy. Makes it somehow easier to trade with conviction to my position.
You comment about a recovery going into a fourth year. Actually, longer expansions are extremely rare. We’ve had three . One in the 1960s when spending on Viet Nam was the reason and it generated severe inflation. One in the 1980s under Reagan that was essentially because the early 1980s recession was so severe. The third was the 1990s when we got the great technology bubble.
So making comments about what happens now in the economy based on historic experience becomes something of a stretch. I believe the old 4 year cycle model is dead, but that still does not mean we have much to draw on in the way of history.