Economists React to GDP

The always excellent online Journal collect lots of econo-geek comments on yesterday’s GDP stinkeroo: I didn’t feel the need to pile on, but I do dig the difference between the excuse makers and those genuinely shaken by the awful data:

WSJ: "After the economy navigated a brutal hurricane season to post robust growth in the third quarter of 2005, growth cooled considerably in the fourth quarter. Gross domestic product, the broadest measure of U.S. economic output, increased at just a 1.1% seasonally adjusted annual rate as free-spending consumers became more cautious and the gaping trade deficit continued to provide a drag on the expansion. For all of 2005, GDP growth averaged a 3.5% annual rate. What does the slowdown in the fourth quarter mean for the economy in the months ahead?

Economists weigh in with their reactions:

"In both its overall appearance and underlying detail, the 1.1% fourth quarter growth in real GDP ranks as the most perplexing report in memory. At face value, such weakness would seem to make it more difficult for the Fed to tighten monetary policy again. But the underlying details reinforce — if not increase — perceptions that much faster growth lies ahead. Nonetheless, the confusing and conflicting contradictions with other data make it difficult to be confident in any inferences about the outlook."

— David Resler and Gerald Zukowski, Nomura Securities International

* * *

"Consumer spending was actually a little better than expected, rising by 1.1% in the quarter vs. our forecast of +0.3%. I think more of the decline in auto sales was apportioned to the business sector (fleet sales) and less to the retail side than we expected. Housing posted a reasonable gain of 3.5%, but this was less than half of our assumed rise. The monthly source data pointed to a bigger gain, so this is a bit puzzling."

— Stephen Stanley, RBS Greenwich Capital

* * *

"The consensus was a bit optimistic but this is a big surprise. The softness against our 2.6% forecast is explained by two components, fixed investment and government consumption. The former rose only 3.0%, with equipment and software up only 3.5%. This is baffling, given the 19.5% annualized leap in the value of capital goods production and the 14.9% rise in shipments of core nondefense capital goods. We expect big upward revisions."

— Ian Shepherdson, High Frequency Economics

* * *

"While this was a disappointing report, there are signs of a very
sharp rebound in GDP growth in the current quarter. First, much of the
miss in fourth-quarter inventories is likely to spill over to the first
quarter. Second, at least a partial rebound in defense appears likely.
Finally, the ramp for consumption spending is even more favorable in
the aftermath of the fourth quarter data. The bottom line is that we
now see a very good possibility of 5%+ GDP growth in Q1 — versus our
prior estimate of +4.2%."

— David Greenlaw and Ted Wieseman, Morgan Stanley

* * *

"This report is the worst case scenario for the Fed and Mr. Bernanke
and the new Fed Chair will be tested right off the bat. The economy is
slowing, though clearly not as rapidly as the headline number would
have you think. But growth rates in the 2.5% to 3% range should be
expected. At the same time, inflation is slowly accelerating. The
fourth quarter rate was above the FOMC’s previously projected pace.
With energy costs up, the Fed has to be concerned about inflation. I
cannot see the term tame being used in the next statement."

— Joel L. Naroff, Naroff Economic Advisors

* * *

"The only thing that kept GDP growth positive at all was a massive
build-up in inventories — the largest increase in inventories since
early 2002. Apparently businesses were caught off guard by the slowdown
in demand, and have not yet slowed their production accordingly.
Presumably, they will. All in all, this is an extremely worrying
report. I’ve been bearish about economic growth in 2006 for a little
while now, and this has just confirmed my worst fears."

— Kash Mansori, Colby College

* * *

"With vehicle sales now recovering, consumer and capital spending,
as well as GDP activity, will be stronger in Q1. With inventories still
very low compared to sales, inventory rebuilding could significantly
strengthen Q1 growth. The underlying economy remained solid at year
end, despite high energy prices, rising interest rates, and slumping
vehicle sales. The Federal Reserve will still tighten next week and
probably again in March."

— Steven Wood, Insight Economics

* * *

"Wall Street pundits will again try to spin the GDP numbers into a
positive, but I believe that this is the beginning of an inevitable
recession. … In the future, those that can afford to pay the additional
amount on their higher mortgage will have to "tighten their belt" and
not spend as much money in the economy. Consequently, they will hold on
to their car a couple of years longer, not frequent their local
restaurant as often, and cut back on their overall spending."

— Emanuel Balarie, Wisdom Financial

* * *

"Growth will rebound in the first quarter. Car sales are expected to
bounce back. Most companies will see little need to liquidate
inventories. Defense spending will probably grow again. Also, because
the fundamentals for capital spending and export growth are strong, we
predict acceleration of growth for both categories of spending in this

— Nariman Behravesh, Global Insight

* * *

"Yesterday’s durable goods orders data suggested a lumpy capital
spending environment, but one that has improved more than the 4Q GDP
data today suggest. Unit auto sales might never eclipse their Summer
2005 level for a very long time to come. However, unit sales in early
2006 appear to be above the 4Q 2005 level, and will make a positive
contribution to consumption in 1Q. Most assuredly, government outlays
are unlikely to shrink in the coming quarter. While we don’t expect an
reacceleration in trend demand in 2006, today’s GDP data really seem to
undercount current growth, and a 1Q 2006 rebound in measured GDP is
quite likely."

— Steven Wieting, Citigroup

* * *

"With the housing market topping off, if not actually declining,
growth is likely to be substantially lower in 2006 than most economists
have projected. While the economy is currently experiencing healthy job
and wage growth, the falloff in borrowing against home equity will
depress consumption growth. Furthermore, wage growth is likely to spur
the market’s fears of inflation (especially in a context of slowing
productivity growth). This would push mortgage interest rates higher,
further depressing housing prices and residential construction. It is
still too early to say that the housing bubble is deflating, but the
evidence is certainly growing that the process may have begun."

— Dean Baker, Center for Economic and Policy Research

* * *

"This retrenchment in spending was generally foreseen, though
economists weren’t sure on the timing and magnitude. American shoppers
have been the main engine of growth for the US and the international
economy the last few years. But in the process, they have been spending
far more than what they earned. All told, household debt has been
increasing at an annual pace of nearly 12% in the latest quarter, the
fastest pace in 18 years."

— Bernard Baumohl, The Economic Outlook Group

* * *

"We view the fourth quarter slowdown as a temporary development, one
that reflected (1) influences of the August-September hurricanes and
(2) ahuge swing in vehicle sales between 3Q and 4Q due to incentives.
Indeed,vehicle sales were a big drag not only on consumption, but also
on equipment investment. We do not believe this report will have a
measurable bearing on Fed policy, especially with high frequency
indicators from 1Q pointing to strong growth. The expectation is for
the funds rate to rise to 5.0% by the May meeting."

— Haseeb Ahmed, J.P. Morgan Chase

Economists React

WSJ, January 27, 2006 11:17 a.m.

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What's been said:

Discussions found on the web:
  1. spencer commented on Jan 28

    In many ways this is just the impact of Katrina that was originally expected in the 3rd Q.

    But the most significant development was the weak capital spending. There is no explaining that away.

    The big imports and inventoriy probably were closely tied together. Retailers scheduled strong imports before oil prices surged and were unable to turn the flow off. Since they didn’t sell the goods at Christmas they ended up in inventories. but this implies that both should reverse in the next quarter.

  2. scorpio commented on Jan 28

    everyone assumed that cap ex and business spending would take up the slack this year from a crumbling consumer. guess what, they’re wrong. CEOs will continue to sit on that cash, either to buy back shares in the open market to off-set their ridiculous option grants or, if we’re lucky, dividend out to shareholders. but remember, no matter how much they talk about the 50-60% of Americans who now own shares, it’s still just the top 1% who control most of those wealth and any resulting dividends, so not much real-world spending comes from that, at least not enuf to power a huge economy (compared to the home-equite extraction of the last couple years). remember Keynes’ marginal propensity to consume. they can repeal a lot of things, but not that.

  3. alea commented on Jan 28

    Economists React to GDP

    In both its overall appearance and underlying detail, the 1.1% fourth quarter growth in real GDP ranks as the most perplexing report in memory. At face value, such weakness would seem to make it more difficult for the Fed to tighten monetary pol…

  4. KirkH commented on Jan 28

    “equipment and software up only 3.5%”

    I wonder how many economists understand Open Source and Moore’s Law.

  5. PC commented on Jan 28

    More important is how markets reacted to the weak GDP data:

    Equity indices rose strongly shrugging off the bearish news. This makes the sharp decline since 1/11 looks more like a correction than the start of a bear market (at least as at this point anyway).

    T-Note and Bond yields could not decline on the weak data. In fact yields are in the process of confirming a major breakout to the upside. Same thing with European Bund yields.

    How do you make sense of the above? My only conclusion is trying to forecast how markets “should” behave based on fundamentals is a futile exercise. That is also why most economists refuse to give a time frame for their forecasts prefering to use the strategy that “a stopped clock is right twice a day.”

  6. Chris commented on Jan 28

    I have been thinking, if you were to take the excesses that shifted from Q4-05 to Q3-05 GDP numbers (due auto sales brought forward, etc), and shift them back to Q4-05, what is the probability that both Q3-05 and Q4-05 GDP numbers would show a downward trend from Q2-05. And when I ask shifting the excesses that resulted back, I mean shifting them back to the soon to be announced upward Q4-05 GDP number revision. Could we already be in a recession?


  7. calmo commented on Jan 28

    On the face of it, business does not have the confidence in the consumer to warrant further capital investment. [To mull over spencer’s point.] The folks who are close to the data are behaving as if Q1 is not going to be the breakout to the upside. Time to consolidate or be consolidated and
    M&A continues at a torrid pace, no?
    The consumer continues to look at increasing energy costs (Ok, aside from those mid-summer auto purchases, but that was then and now, deincentivized, he is smarter.) and wages that are not keeping up with inflation.
    It looks like the house ATM was accessed less because refi rates and/or housing appraisals were not attractive. Hard to believe that the American consumer has actually bad credit ratings that restrict his behavior; Harder to believe that institutions actually enforced tougher regulations; Harder yet to believe that the American consumer did this on his own accord and decided to save rather than spend during the Xmas quarter.
    This report was the one I was expecting for Q1. A month early means that the ff won’t make it to 5% –without a large retracing in crude oil prices and/or another puff into the housing bubble, both requiring more imagination than I can muster.

  8. touche commented on Jan 29

    I think most economists have been expecting economic growth to revert to a long run mean. But they ignore the skyrocketing current account deficit and mushrooming household debt. The US economy has lost its competitive edge, it continues to lose it, and there’s nothing to suggest that it will ever get it back.

    Globalization is like the Olympics for world economies. The US showed up and was emaciated.

  9. Jim S commented on Jan 30

    Let’s see, American businesses fire people, offshore their jobs, hire them back for lower wages with fewer or no benefits and then they and their Republican pets act surprised when consumer confidence and spending inevitably tank?

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