Markets rallied yesterday morning on the Final GDP data, revised to 2.5% – up from 2.2% Preliminary report (2/28) but down from the initial Advance (1/31) read of 3.5%. But the indices gave up those gains and then some as the day wore on. A little "window dressing" into quarter’s end closed the markets in the green by day’s end.
Was the GDP "improvement" really all that good? A quick look at the details suggests otherwise.
The 0.3% improvement was two parts inventory build (primarily autos), one part GDP deflator "adjustment." Pretax corporate profits decreased
0.3% in the fourth quarter of 2006, the first quarterly decline since
the third quarter 2005.
CapEx spending remains punk, as corporate management is cutting back on all manners of spending to avoid eating into profits — short term thinking at its finest. Nonresidential investment fell 3.1% for Q4, worse than the initially reported decline of 2.4%. But the big miss was Equipment and software spending — down 4.8% (vs initial -3.2%). This is consistent with the series of weak durable-goods reports we hav sen the past few months.
Signs of economic strength? Hardly.
Reuters:
"The (GDP) headline number looks better, but the gut of the report is a
little worse," said Robert Brusca, chief economist for Fact and Opinion
Economics in New York. "Going forward, we still don’t know, but you
should be disturbed by the lack of capital spending."Business
investment spending fell at a 3.1 per cent annual rate in the fourth
quarter rather than the 2.4 per cent decline the government estimated a
month ago. That contrasted with a 10 per cent third-quarter jump.Spending on new-home building plummeted by 19.8 per cent – even steeper
than the 19.1 per cent fall estimated a month ago – after an 18.7 per
cent drop in the third quarter.It was the fifth quarter in a
row that residential spending has fallen and the steepest since a 21.7
per cent plunge in the first quarter of 1991 when the economy was on
the brink of recession."
The overall trend of GDP, corporate profits, durable goods and CapEX spending is downward. Housing, Autos, and Manufacturing are already in a recession (I have a car coming off lease May 1st, and I plan on waiting some time to see what sort of incentives the auto industry will be throwing my way as inventory continues to build). I don’t see how these issues get any better any time soon.
Goldilocks has left the building . . .
>
Source:
U.S. GDP growth hobbled by stocks of unsold goods
Rising inventories, give year-end lift but spending curb suggests slowdown
Glenn Somerville
Reuters Mar 30, 2007 04:30 AM
http://www.thestar.com/Business/article/197577
The NY Post had an article yesterday saying milk will be up 24% y-o-y…24%!!!!!
Luckily there is no inflation and we don’t need milk, otherwise that would really suck.
That’s a whole lot of furious spinning you’re doing there, Barry. You managed to turn unexpected strength in the GDP numbers into a big downer.
~~~
BR: It is what it is — those are where the 0.3% gains from the 2nd to the final GDP data came from.
You can accept the headline number, or you can drill down and see what’s behind them. I choose to get deeper into the data analysis and see how the headline number came about.
Mr. Market rarely trades on data because data is what everyone already knew.
We have shifted from heavy short to some long positions especially mortgage issues!
Well, a cheerful Friday morning to you, too!
This morning consumer spending is up, up, up so the economy must be doing really well. Go back to sleep, all is well.
“CapEx spending remains punk, as corporate management is cutting back on all manners of spending to avoid eating into profits — short term thinking at its finest.”
Is there any other way in publicly-traded corporate America today (unless you are Warren Buffett, Eddie Lampert, etc.)?
I am hoping Nova Law is being sarcastic.
She may have left the building, but have the bears finished shitting in the woods?
The NY Post had an article yesterday saying milk will be up 24% y-o-y…24%!!!!!
Luckily there is no inflation and we don’t need milk, otherwise that would really suck.
I don’t know if I would take any economic data from the Post to truthful.
Brusca had been predicting increasing economic strength that would cause the Fed to raise rates by year end.
At leaset PCE and Core PCE are down…
Chicago PMI 61.7…come back Goldi, all is forgiven…
Nova-
That “unexpected” in the same way that the housing numbers on monday were also “unexpected.
It’s only unexpected if you don’t read, interpret or have any of your own opinion…but I digress. I guess it’s just a “surprise”…
Ciao
MS
What is up with that Chicago PMI number? Where did that strength come from?
We still have bernancke speaking at the CBOT later…….not over yet. It could close over 100pts and it would’nt surprise me a bit after Benny-boy opens his mouth and saves the day for everyone.
Ciao
MS
I’ve been reading this blog almost daily for about a year. I am not an economist or a stockbroker. I took one course in finance that mentioned a lot of the principles discussed here. I have a question about the validity of the Treasury yield curve as a predictor of a recession. For the past year or so, the yield curve has been inverted, which historically presages a recession. I follow the treasury yields posted daily the business section of the paper. Recently, the yield curve has appeared to start “un-inverting”. The shorter term yields are dropping, and the 30-year is rising. My question is, when that happens, does it mean that the risk of recession is lessening, or is the Treasury yield curve no longer an accurate predictor? If we are in an inflationary environment, why are the shorter term Treasuries yields dropping?
My pet theory is we’re in a period that’s the opposite of Goldilocks, not hot enough to goose corporate profits, not cold enough to get the Fed to drop rates. In other words, just wrong.
Now that we have Feb real PCE data it looks like 1st Q real PCE growth is almost certain to be weaker then 4th Q -probably something on the order of 3.7% versus 4.2%. So to get a stronger 1st Q we are going to have to find a significant area of strength somewhere else.
Good luck.
Well Valdan, there’s no more talk about the inverted yield curve being the harbinger of recession because the yield curve is no longer inverted.
http://tinyurl.com/ywg2nq
Of course, there has been very little discussion of this fact here, since it doesn’t support the “Sky is Falling” doomsayers.
You all keep depositing those gold coins in your coffee can buried in the back yard. As for me, I’m up 19% in the last year while everything was supposedly going to hell.
Come on Barry…that’s why they call it a “soft landing”…rather than a soft take off.
What is the “dis-inverting” yield curve suggesting to you??
typical response…”I don’t care.. I got mine” you most likely think Steve Jobs did’nt do anything either if you own apple stock.
Ciao
MS
A couple of good economic #’s report and all of a sudden the world’s suddenly sunnier !?!?!?!?!
simmer down boys and girls , we’ll get a few bad reports next week , this movie is only half way through
Valdan, also see here
Goldilocks has left the building…
maybe she will be re-hired at a lower wage ala
circuit city.
Valdan,
Here is another take on the inverted/un-inverted yield curve discussion.
“When the curve begins to steepen out of an inversion, the recession alarm bells go off.”
Obviously, you can steepen two ways–you can drop short rates, or raise long rates. According to this article, after an inversion, the curve will steepen prior to the recession as the “price of money” (interest rate) rises. Since they aren’t dropping short rates, must be the price of money is rising. The question is…why is that happening? They suggest possible caution against faulty lending (i.e, subprime), or because the Fed is not feeding the system as much as they were. It is a bit long winded, but I found the whole article interesting.
http://globaleconomicanalysis.blogspot.com/2007/03/is-fed-really-pumping-money.html
Thanks for the info, Macro Man and Nova Law. Nova, I have likewise been pleased at how my modest investments have performed in the last year. I am going to put an entry in my Outlook calendar for a year from this time, to see if a) the economic sky has fallen b) we have nuked Iran c) oil is $200 a barrel d) gold is $1000 an ounce and e) the Dow is at $7500 as the various sages of the internet have been intoning .
I have a feeling on March 30, 2008 I will be ROFLMAO.
Polly Anna, what an appropriate handle you have.
So, let’s see if I get this straight. If the yield curve inverts, it’s a bad thing, a sure sign of recession. And when the yield curve uninverts and “begins to steepen out of inversion,” it’s a sure sign of recession. Great analysis!
Heads you win, tails I lose!
“Goldilocks has left the building”
Too bad you did Mr. Goldilocks’ show yesterday (although he wasn’t there). Larry loves cheerleading but this is shaping up to be a lengthy downturn. It will be difficult to turn on his show and see him sift through day-after-day of bleak news. Maybe he’ll take a lot more vacation days?
“What is the “dis-inverting” yield curve suggesting to you??”
That a recession is coming. Yield inversions always begin to reverse prior to GDP dropping below zero.
Nova Ambulance Chaser,
Yes…you’re right. It is the mirror image of your take–inverted curve=no recession, steepening=no recession.
I was posting someone else’s article, not giving my own viewpoint. That being said, I am sure you neither read that article, or have any analysis of your own worth discussing.
People like yourself who consistently generate 19% returns (laughable) are given the term “bull” for a reason.
19%…that’s all?…..;-)
Ciao
MS
Polly and winjr are right: the bounce off the bottom has always (in recent history) come just before the recession.
Assuming the bulls aren’t fibbing I guess I’m on the other side of their trades; e.g., I’ve done well (a lot better than 19%) swing trading and/or shorting individual home builders and subprime mortgage lenders this past year and see no reason to stop now (both sectors are pretty banged up but for some inexplicable reason still have long-side true believers/bottom fishers and some of the alt-A outfits are now in play too).
I may actually be a long-term buyer of some of these names later (like in 2008/09) but right now it’s fun and games in my trading portfolio.
You wouldn’t believe how conservative and strongly hedged my strategic portfolio is though — (wish I could say it was up 19% ytd but the best that can be said there is that it continues to beat t-bills by enough to make it worth the effort) — I still have some confidence in trading individual names these days but absolutely none at all when it comes to the markets as a whole and discipline forces me to trade accordingly. C’est la vie.
Winjr…care to back up that statement with facts?
Yield curves dis-invert when bond traders sense coming improvement in the economy — like when the Fed cuts rates (typically as we head into a recession.) It’s an effect..not a cause. lol
Snipe alert. Why are they saying this?
UPDATE 1-US says Fannie Mae, Freddie Mac capital adequate
hint. because it’s not
It’s better to look at the 3-month and the 10-yr T’s to guage the “re/in-version” of the yield curve… well, that’s according to Fed studies.
If you plot out the 10yr-3mth spread and look at it with recessionary periods, you’ll see that the last couple of recessions came as the spread was coming off the peaks or as the yield curve was “un-dis-re-verting.”
Plus, the Democrats got their wish and are imposing tariffs on Chinese imports… yeah, that’ll be good on inflation and the economy.
Bernanke probably hates his job right about now.
Fred, I see that Intel has decided to build that chip factory in China instead of here which doesn’t help our flat cap ex spending,and M-3 continues to “grow” at double digit rates, normally a negative for bonds, but also the concentration of wealth in the US continues to rise, which is normally a positive factor for lower interest rates. But now that “the peasants in China” and India are eating better, I think you should eat less steak to try to keep prices down for the less fortunate in the US.
Excellent analysis Barringo.
Ted…you and Lou Dobbs must be psyched that Bush has folded like a lawn chair on the Smoot-Hawley style tarrifs for China!
You guys may get your recession yet.
Stupid is as stupid does.
Fred, are you the Fred Dobbs that regularly posts here? And there’s a good book out that should help you and something else that you should like, you can buy it used, real cheap @ Amazon.com. It’s called CHINESE FOR DUMMIES. And btw, what is the difference between China running its printing press full blast and buying US long treasuries with savings it doesn’t have, and Arthur Burns exploding the monetary base and buying down our long debt in the 70’s? I want your answer, and I want it right now!
What savings does China not have, Teddy? $4 trillion in private sector savings, huge current account surplus approaching double digits as a percentage of GDP. Where do you get the idea that China doesn’t have any savings? Quite the contrary: they have too much savings and not enough consumption.
Macro Man, the bible says there is none so blind as he who will not see. And please don’t speak unless you can improve the silence! You are looking backwards. Latest reports indicate that the US is importing inflation from China. So, why don’t you tell China to take those US T-bonds they have been buying lately and repatriate them since there currency is “fixed” to the dollar anyhow!
teddy…you’re a symphony of confusion and delusion.
Fred, your time is coming and the truth will set you free! You’re a pathetic example of a human being! Shame on you!
And Fred……….answer my question!
I’d love nothing more than for China to quit buying dollars. I make that very point with depressing regularity on Brad Setser’s blog, and indeed my own. Suggesting that China has a problem of a savings deficit, rather than a savings excess, however, is so factually incorrect that it virtually defies hyperbole.
Macro Man, I went thru this same bruhaha with you awhile back and I guess you weren’t awake. Yes, as I opined previously, China has a huge savings EXCESS, but they are exporting more right now, which should represent savings, than they have in current production of savings. That is why there is inflation in China.
I was awake, Teddy. You were talking bollocks then, and you’re talking bollocks now.
Consumer spending must be strong? Your lying son. It has weakened a good deal and PCE will be 1.5% to 2% this quarter.
Not very intelligent. The PMI is a farce. Nobody ever uses that wastefull “index”. Considering its failure last month, it will fail again this month.
For crying out loud, please be civilized. Get back to debating facts and ideas and quit attacking each other.
There’s been more than the usual lot of sour grapes lately.
If any of you are able to see the forest through the trees, please articulate it, and give us some ideas for trading.
Consumer spending will only remain strong if the FED resumes low interest, relaxed requirement loans – a.k.a. The Money-For-Nuthin’, Chicks-For-Free Party – from all indications the US Housing ATM liquidity pump has been cranked dry for the foreseeable future ;-)
“Paramount among the responsibilities of a free press is the duty to prevent any part of the government from deceiving the people.” – Hugo Black, Supreme Court Justice
It was just published that thru 2005, the concentration of wealth in this country continues to rise. Do we ignore the whole year of 2005 and the trend for the last 20 years or do we look at the latest monthly stats from the government that wages have started to rise and draw conclusions?
RW,
Nova Law didn’t say he (or she) was up 19% YTD. He (or she) said he (or she) was up 19% in the last year. That could mean 15 months or 12 months (april 2006 – march 2007). He (or she) doesn’t make that very clear. So RW, I suspect your conservative strategy is likely up that much or more in the past 12 – 15 months. I can’t say I would be disappointed with 19% (and fortunately can claim better performance), but let’s face it, Nova law is extrapolating that no one has made any money in the past year (or 15 months) because they are recognizing the bearish economic signals and calling them bearish. People can have bearish views and still invest long and make money and vice versa. I hope he (or she) learns not to extrapolate incorrectly in law school.
wages have started to rise and draw conclusions
Yes, Productivity has collapsed and some sloppy hiring practices have started. Wages rose greatly in the 70’s to, great period(yes, I am being very sarcastic).
“The PMI is a farce. Nobody ever uses that wastefull “index”. Considering its failure last month, it will fail again this month.”
it’s about time someone has said this! the facts have been stating that manufacturing has been in a recession for MONTHS. M-O-N-T-H-S.
it’s so clear and evident, yet people believe we are at the precipice of this event, even though we are in the middle of a manufacturing recession.
“Winjr…care to back up that statement with facts?
Yield curves dis-invert when bond traders sense coming improvement in the economy — like when the Fed cuts rates (typically as we head into a recession.) It’s an effect..not a cause. lol”
Har!
I don’t do other people’s work unless I’m being paid. If you think my assertion is incorrect, then come back with your proof.
You can start with a 50 year graph of yield “dis-inversions”, with recession periods shaded in grey. Let me know if that proves your point.