"The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists."
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Today’s Q1 GDP release will be interesting, to say the least.
After the Q4 GDP revisions (which we forewarned about), I’ve gotten many emails asking how and what goes into GDP data. As you requested, here is a grossly oversimplified review on GDP data:
GDP is the sum total of the economic activity in the nation. It is comprised of Personal consumption, plus Gross domestic investment, plus Government consumption and investment, plus Net exports.
Putting that into a simple formula would look like this:
GDP = consumption + investment + Government spending* + (Exports − Imports)
There are 3 GDP releases: Advance, Preliminary, and Final. We get one at the end of each month. Because some of the data takes a while to assemble, the first two releases are often revised. Recall the initial 2006 Q4 release was 3.5%, which turned out to be off by almost 30% (final was 2.5%). The range of revisions is typically between 50 and 100 basis points. There’s no grand conspiracy here, it merely takes a while to assemble various data, like capital spending, imports, exports, etc.
Once we have a GDP number, we can look at it two ways: Nominal and Real. Nominal GDP is the dollar value of output (see formula above), regardless of inflation. Real GDP takes into account how much of the increase in dollar output is attributable to price increases, versus output increases.
Okay, with that out of the way, lets look at how GDP and its components might shake out this morning. The WSJ’s Justin Lahart notes:
"The Commerce Department reports first-quarter gross
domestic product today and economists don’t expect good news. They
estimate the economy grew at a 1.8% annual rate, slower than the
already tepid fourth-quarter rate of 2.5%. That would make it the
fourth quarter in a row that GDP has grown at less than 3%. The last
time that happened was during the jobless recovery of 2002.The biggest drag on the economy continues to be
housing, which subtracted more than a full percentage point from GDP
growth in the previous two quarters. Business spending was lackluster,
leaving it to American consumers to generate demand. That’s worrisome,
says Northern Trust economist Paul Kasriel, because consumer spending
has weakened. Hardly noticed amid the stock-market rally, Target said last week that it expects its sales in April will be much lower than anticipated."
The big variable is if, and how much, consumer spending slowed. We know that Residential construction slowed significantly, equipment and software CapEx was flattish. Another wild card is inventory build, which has shown an ability to surprise the past few Qs. And given the weak and falling dollar, and the profit strength of multi-national companies, perhaps US exports improved somewhat (more exports + less imports = higher GDP).
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Now for the market question: Do traders want to see higher GDP, implying greater profitability or weaker GDP, greasing the skids for a Fed Rate cut sooner rather than later? I have nary a clue as to which is more market friendly. We’ll find out in half an hour . . .
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* Note that some forms of government payments — social security, medicaid, etc, are not included in GDP’s formula.
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Sources:
Heady Stocks Leave Economy On the Ground
JUSTIN LAHART
WSJ, April 27, 2007; Page C1
http://online.wsj.com/article/SB117763391886584237.html
News Release: Gross Domestic Product and Corporate Profits
BEA
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
1.3% with 4% deflator-How much of that can be said to be spending on our current wars?
I think 1.3% is already adjusted for inflation, but I could be wrong.
What? 1.3% growth? And I’ve been reading here for all these months about how terrible the economy is, about how the crash of the housing market has left us in a recession – nay, a 1930s style depression – and you mean to say there’s actually growth?
I mean, I just read yesterday that there are no cars being sold, no racehorses being auctioned off, no boats being bought, condo associations going broke everywhere, furniture not being bought…..
All this bad news and you tell me there’s growth? The government is lying. LYING, I TELL YOU! There are Hoovervilles everywhere, and 25% unemployment, and the END IS NIGH!
Great stuff Barry. Thanks
Especially that link to Q4 revisions.
I’d love to hear more about that personal consumption deflator.
Counselor! — Approach the Bench
sotto voce, to the lawyers
Young man, one more outburst like that and I will have you flogged.
You well know that no one suggested a depression, nor did anyone in this court say we are currently in a recession.
To reiterate what you missed while doodling on your yellow pads: DECELERATION. Growth is slowing. It is not yet negative. Yes, we are expanding, but it is at a much slower rate than previously. And that rate is on the downtrend. Think movie, not snapshot. Not zero car and boat sales — slowing sales.
Stick to the data, and stop making ridiculous outbursts. The next time you make a factually false statement like that, I will hold you in contempt, and inform the bar association of your behavior.
Now go back to your table, and behave like an adult.
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The jurors are instructed to disregard the latest outburst of defense counsel. Do not hold the inappropriate and unprofessional outburst of Counsel against his client.
15 minute recess
Nova Law, LESS growth than expected, and borderline recession to boot.
The recession might start as early as this quarter, given that some of the growth in the 1stQ was borrowed from the 2ndQ (early Easter).
As for “25% unemployment”. Did you know that entering recession in 1929, the US had 3.9% unemployment, and just 3 years later that was up to 25%? Do you know why? A debt-fueled chain reaction is the answer.
Q1 GDP rose at an annualized pace of 1.3%, the slowest rate of gain since Q1 ’03. The Price Deflator was a full percentage point higher than expected rising 4%.
Personal Spending did rise .3% more than expected, rising 3.8%, vs the consensus of 3.5%. BUT headline PCE price deflator rose 3.4% so Real Spending was up just .4% as inflation has driven the sales #s.
Residential construction fell 17% and real final sales which takes out the impact of inventories, rose just 1.6% down from 3.7% in Q4.
Govt spending slowed. Commercial construction rose 2.2% and spending on equipment and software rose 1.9% after being down 2 out of the 3 prior quarters.
The PCE core deflator rose 2.2% up from 1.8% in Q4. The overall inflation Price Deflator rose 4%, the most since Q1 1991.
Bottom line, the world’s biggest economy continues to slow and while overseas economy’s will be much better off than in the past, they are not immune.
Touche!
Barry, how did you know I’ve made my bones tweaking judges? One thing I learned early in my career is that the jury, not the judge, makes the decisions in a trial. And the jury wants high drama, entertainment, and excitement, while the judge would like things nice and quiet, for his two hobbies are watching paint dry and watching grass grow.
Come to think of it, judges probably have a lot in common with macroeconomists. ;-)
One technical aspect of the data makes it easier to understand why revision are so large.
When the first report comes out we have three months data on consumption, investment and government but only two months data on trade and inventories. In the gdp release the average of the three months data for consumption, fixed investment and government is used. but for trade and inventories the gdp report uses the change from the final month of the quarter to the final month of the quarter. So for the more stable components of gdp we use a smoothed average of the three month data. but for the most volatile data — trade and inventories — gdp uses an unsmoothed change from point to point. Moreover, this is the very data we do not have the third month data on when the first estimate of gdp is released.
If they revise these numbers downwards, is it possible that growth for Q1 could actually be *gasp* negative ???
Well slower growth only means a rate cut . Time to run the Dow up another 500-600 points. This disconnect between the economy and the stock market is getting serious.It can only end badly.
“One thing I learned early in my career is that the jury, not the judge, makes the decisions in a trial. And the jury wants high drama, entertainment, and excitement, while the judge would like things nice and quiet, for his two hobbies are watching paint dry and watching grass grow.”
Really? When your “high drama and entertainment” approach runs afoul of basic trail conduct, are you summoned to approach the JURY where you practice? Until he gives them the case for resolution, the judge has total control and makes all the decisions, at least where I come from. And even AFTER they render a decision, the judge can set it aside on various grounds. More self-glorious hyperbolefrom “Nova Law”.
NO GO law… too many pumpkin spice lattes this morning?
Well, MarkM, I’ve never had a jury trial verdict overturned either by the judge or an appellate court, nor have I ever been sanctioned. I’ve lost my share of cases but won many more than I lost.
Best of all, I made a lot of my smug opponents unhappy, however, and as you can see I enjoy it very much.
1.3%?
Ouch.
Barry,
LMAO – literally.
No offense, Nova, but that was hilarious.
I really don’t understand this. If the economy is slowing, why is the stock market not correcting downward to reflect this? Is the stock market performance all about international growth? Is international growth good enough to keep it going?
I really don’t understand this. If the economy is slowing, why is the stock market not correcting downward to reflect this? Is the stock market performance all about international growth? Is international growth good enough to keep it going?
N/L-
So you say.
Not that financial blogs should be the forum for discussions of basic trial mechanics, but when running off about legal matters do try to stick somewhere close to the facts. I understand that it gets in the way of a good story sometimes.
Nova–
unhappy? time for an ego check. you’re a mosquito. annoying, ultimately inconsequential.
and a remarkably immature mosquito at that.
go hit the motley fool boards. people here are generally a tad more sophisticated and experienced than you. you might be appreciated there for your rapier-like wit and informed commentary.
ciao, bambino.
When your “high drama and entertainment” approach runs afoul of basic trail conduct, are you summoned to approach the JURY where you practice? Until he gives them the case for resolution, the judge has total control and makes all the decisions, at least where I come from. And even AFTER they render a decision, the judge can set it aside on various grounds.
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Apparently you have never been in a courtroom. Granted, it is not like TV, but I’ve seen my fair share of “film ready” attorneys play to the jury. And in front of a jury, it is not often that a judge throws his weight around, for fear of admonishment by the appellate court on appeal.
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An economic question: what is the accepted definition of a “soft landing”?
Nova,
Sometimes big ships go down slowly… but keep playing happy music for us all the way down.
LAWMAN,
Where everyone loses their job except you.
:o)
Lawman-
You couldn’t be more wrong. I have seen plenty of trial attorneys with flair, but none who didn’t know who had the case (judge or jury) at what time, and there are PLENTY of judges who like to “run their courtrooms” an area that appellate judges give WIDE LATITUDE, HAVING BEEN THERE THEMSELVES. Nice try.
So, Bank of Mexico raised interest rates by .25% as “preventive measure”. Anybody has ideas to share?
Meanwhile how does S&P react to measly growth and 4% inflation? Down a whopping 4 points.
Take a look at this story about how the falling dollar is propping up earnings.
http://www.cnbc.com/id/18328850
Most of the time, earnings growth will correlate loosely to GDP plus inflation.
Stocks tend to use that input, then adjust for interest rates. We get short term swings based on Sentiment, liquidity, etc.
It is a loose correlation, not precise, And as we have seen in 1982, 1987, 2000, 2002, etc, it can move way above or below a few standard deviations.
MM: You are starting to sound like NL. Did you get hammered by a judge along the way?
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Seriously, what is the definition of a soft landing?
According to BNP Paribas (via Bloomberg), since 1960’s every time GDP fell below 2% it was followed by a recession within a few quarters.
Is it different this time?
So Barry…could you please clear some confusion on your various outlooks?
-Are we still in a secular bear market? and where do you see the market in 12 months?
-will housing and the consumer send us into a recession?
-What’s your view on the dollar? (12 mos)
-what’s you view on interest rates?
-will Rosie only use one sheet of TP per session?
Seems the market is having a tough time figuring out the advantage/disadvantage of this latest GDP number. Looks like the Green Team is betting on Fed invtervention to lower interest rates while the Red-Heads are looking at this quote from Janet Yellen, President and CEO of the Federal Reserve Bank of San Francisco:
“At the same time, much of the news pertaining to the first quarter has been disappointing, and has raised the downside risk for growth. I continue to think that inflation is likely to edge down over the year, but, with labor markets appearing to have tightened further, rather than easing as I expected, the upside risks to this outlook have gotten bigger.”
I would like to ask Ms. Yellen how she thinks inflation could have ever been contained when the Fed has waived its rights to control the money supply?
This looks to me more of an admission that the Fed has no powder left in its barrel.
Yellen of Fed Says Data Has Raised Downside Risk to U.S. Growth
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vYIgEQ7qWki8.asf
Lawman-
Weak attempt at deflecting the point. And the answer is no.
LAWMAN,
I think ‘soft landing’ for the economy means the same thing it does for us pilots:
“Any landing you can walk away from is a ‘good’ (soft?) landing.”
/Moving to cash; I’m ‘walking away’ from this landing.
For those of you who actually read the 37th comment on a post….
a good tell re: the market should be the major indices priced in euros.
Economics/markets are all about the marginal buyer/seller.
Europeans (the largest foreign investors in US equities) have been underwater for about 1 year now, despite nominal highs. With the weakening dollar, will they be encouraged to invest like binging tourists in SoHo or will weakening growth cause them to repatriate before further collapse of .DXY?
That could dictate the direction of the market for the rest of the year.
btw, not to hijack the thread, but I have to agree with LAWMAN; until it’s in the hands of the jury, the JUDGE is indeed in control of your case.
What good is playing to the jury if the judge won’t let them see your evidence?
Wow, check out that perfect timing: GDP sucks, but look! We captured a turr’st!
They got him a few days ago, and they held the news until today.
This should be good for a hundred Dow points today. This all gonna end so, so badly…but not any time soon.
These comments of looking at our market’s performance in other currencies is disengenuous, imho.
The dollar “inflated” during the 90’s to OVERVALUATION levels due to BRIC and Eastern European economic disasters. They have gotten religion, and flows left the safe haven of the Us $$ to participate in their recoveries.
The greenback is back to where it is supposed to be. Shorting the dollar from here is not a great bet, imho.
Pool Shark-
That was MY point, not LAWMAN’S.
Interesting comments from Jeremy Grantham – a worldwide bubble? This article is on the Yahoo finance main page, so it’s getting wider distribution than most commentary. What thinks the commentariat here?
http://biz.yahoo.com/ts/070427/10353243.html?.v=2
Someone who thinks logically provides a nice contrast to the real world.
Someone who thinks logically provides a nice contrast to the real world.
(Whoa, all these attorneys are making me nervous… I feel I may need to lawyer-up just to comment.)
As Johntron points out, the topic of the weak dollar needs some attention. In Euro terms, the run-up in the US dollar denominated stocks is very blunted.
Fred, one question. If the dollar is now fairly valued, then are the Euro, Pound and Yen overvalued? Just wondering.
Every trial judge hates to be reversed. The two ways she/he will get reversed is to give the jury bad instructions and to keep one party from being able to present evidence. MarkM sounds like one of those Yale-trained lawyers who looks good in a 3,000 suit but whose arguments for evidence exclusion and bad jury instructions ultimately bring ruin for their clients.
By the way, I can see that LAWMAN knows exactly how trials work. (And for your benefit, friend, you’ll know that it’s a soft landing is when the bears sell out and go long.)
Since this site is so fond of “drilling down” the numbers, I wonder what the GDP number was ex-housing. Anybody care to offer up an analysis? I haven’t seen any of you bears do it, so I’m guessing the number ex-housing was pretty strong.
They may be a bit overbought, but are approaching more stable levels, imho. The Yen will rise when they start to grow again, and all the shorts are forced to cover.
FXY is a great hedge there.
Thanks Fred.
Nova Law,
It is time to suck it up and admit you are wrong. The jury has reached the verdict. You have lost the case counselor.
P.S. If you want GDP-Ex Housing and Inflation-Ex Inflation nonsense, you should know it by now where to find the twisted and distorted data: http://www.poorandstupid.com/chronicle.asp
N/L-
Nope. Wrong again. $200 suits. But that was a lot of money in the day. You and LAWMAN (is that your brother?) apparently practice in front of trial judges who constantly peek over their shoulders toward the state capitol. Jury instructions? Evidence exclusions? Way to change the argument so that you can “score” a phantom point. Same tack LAWMAN tried. You tried to post some pompous story about being Clarence Darrow, got busted and now you are spinning furiously.
It’s noon. Time to take my profits and shut it down for the week. Good day to you Sirs.
Nova,
We can not publish a core GDP growth or GDP ex housing because then there would be no rationale for a rate cut. Keep the GDP numbers looking bad and the likes of Janet Yellen will be behind rate cuts. So the bulls should not be talking about GDP ex housing.
MM: My attempt to deflect was in good faith, and to spare the rest of the posters a pissing match between lawyers which really has no point and is irrelevant to the discussion regardless.
Lawyers are such a bore. (how do I know? I ve been one for 24 years) uggghhhhhh
Ryan: “I really don’t understand this. If the economy is slowing, why is the stock market not correcting downward to reflect this? Is the stock market performance all about international growth? Is international growth good enough to keep it going?”
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I sympathise. As an FNG myself. I found this useful:
http://immobilienblasen.blogspot.com/2007/04/sale-of-century-buy-backs-economist.html
The article here from the Economist outlines how share buy-backs (and Private Equity deals) are reducing the number of outstanding shares therefore decreasing the size of the pie overall and increasing SPs. I don’t pretend to know how much of the S & P’s nominal gains are attributable to this or, but it goes to show there is a lot of slippage between the economy and the stock market that is “supposed to” track it. (Said who?) Another area of slippage is dollar depreciation: if the dollar goes down shouldn’t share prices go up? (Apparently Zimbabwe’s equity market is booming.) Once again, I don’t know the answer to this, just trying to point out that looking at the stock market principally as a mechanism used for assessing the economy’s prospects isn’t going to lead to much understanding. FWIW I’ve found the counter-intuitive linkages between currencies, asset prices, credit conditions and monetary policies the most entertaining aspect of learning about investing. The surprising, ironic outcomes these linkages create, even when thery make you poorer, at least have the ability to make you laugh.
Ryan,
It has been shown that some of the best equity gains come as the economy is slowing down….as long as it’s not off a cliff. The market discounts the future economic conditions (usually). The bond market has been predicting this slowdown. The equity market is predicting a recovery. Wall Street got hoodwinked by the “all negative-all-the-time” press and blogosphere. They reduced expectations too much. We’re now seeing “the rest of the story”.
Despite the dissing it gets here, models show that stocks are very undervalued relative to the bonds, and earnings have NOT peaked. ($$ will be treated best in stocks).