Flatlining GDP & NFP

As much as I typically like to discuss NFP on the first Friday of each month, I find myself unable to muster the usual blather. Not because the initial data is near garbage, subject to massive revision, and wildly off from reality — that’s a given.

No, today I find myself unable to get enthused about NFP because I am still reeling from the horrific GDP data we got yesterday.

Gdp_wsj_20070531
Yesterday we learned that in Q1 2007, the economy expanded at the near zero growth pace of 0.15%. That’s practically flatlined. This was the worst reading since a 0.2% increase in Q4 of 2002.

What’s that, you ask? In the media, GDP was reported at 0.6% you say? Um, no — that’s the annualized rate — take Q1 GDP and go mulitple it 4X and THAT’s how you get to a still pitiful 0.6%.

The sunshine crowd bamboozled the press on this big time. Articles such as this one: U.S. Economy: First Quarter May Have Been Low Point — report conjecture as fact and completely ignore what the actual data is. The WSJ was no better:  Slow Growth May Presage Pickup.

Or not. 

Here are the facts: The U.S. economy grew last quarter at
the slowest pace in more than four years. The initial GDP report of 1.3% was actually more than double twhat the updated data showed, and was 25% below economists consensus. Housing, slack capex investment, declining consumer activity all are responsible for part of the slowdown.

Meanwhile in Europe, Business Investment has picked up dramatically. Europe’s economy is growing about 4X the rate of the US in Q1.

Also included in the Commerce Department Data was that consumer spending was revised upward, to 4.4% from 3.8%. Note that if not for this revision, we would be talking about a sub 0% GDP. That would be the first quarter of 2 needed for the official measure of a recession.

How is it possible that consumer spending rose, when 80% of retailers have been missing numbers? Easy: Rising prices (not sales) in food and energy. You know, those elements the Fed hates to measure when it comes to inflation.

How and why most economists think that this is the low point is simply beyond me.

>

Sources:
U.S. Economy: First Quarter May Have Been Low Point

Shobhana Chandra
Bloomberg, May 31, 2007
http://www.bloomberg.com/apps/news?pid=20601068&sid=amY1npUWWskA&

Europe’s Economy Grows 0.6%, Led by Investment Surge
Fergal O’Brien
Bloomberg, June 1 2007
http://www.bloomberg.com/apps/news?pid=20601068&sid=aVGPpxHmSbpk&

Slow Growth May Presage Pickup
Thinned-Out Inventories Mean More Output Ahead; Consumers Propel Economy
SUDEEP REDDY
WSJ, June 1, 2007; Page A2
http://online.wsj.com/article/SB118061455598919992.html

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Don commented on Jun 1

    Thanks for your commentary it is greatly respected and appreciated.
    My response was WTF to those same headlines. Am following the ball until the trend changes. Have a feeling that when fear returns the weak hands will end up with soiled pants. Have a great weekend!

  2. Jim commented on Jun 1

    You guys don’t get it, the Govt and big business are controling the media spinning BS and will continue to paint the rosy picture we “need” to see from all different perspectives.

    Same reason goes for not showing the dead soldiers from IRAQ coming home in the caskets. The news is sanitized and twisted so we the “weak Americans” can handle it.

    Government in action.

  3. metroplexual commented on Jun 1

    So housing will have a minimum impact on the economy? No equity jumps this year seems to have translated to no big spending. I think when MEW is analyzed for this year it will be found to have flatlined as well.

  4. toon commented on Jun 1

    One must understand that market always moves up right before GDP hits the lowest. That is why economists cannot be traders.

  5. costa commented on Jun 1

    wow had no clue about that spin the media pulled yesterday. Thank you Barry this site is great.

  6. mhm commented on Jun 1

    “There [is a measure] which if not taken we are undone…[It is] to cease borrowing money and to pay off the national debt. If this cannot be done without dismissing the army and putting the ships out of commission, haul them up high and dry and reduce the army to the lowest point at which it was ever established. There does not exist an engine so corruptive of the government and so demoralizing of the nation as a public debt. It will bring on us more ruin at home than all the enemies from abroad against whom this army and navy are to protect us.” –Thomas Jefferson to Nathaniel Macon, 1821. (*) FE 10:193

    If he could see what debt is doing today…

  7. wally commented on Jun 1

    but…but… everything is sunshine and roses and it is springtime and everything is wonderful and the future is so bright and it is a great time to buy a house and the stock market is rewarding the faithful and productivity is rising…

  8. daisycolorado commented on Jun 1

    Oh please, I hate the ‘its all a media conspiracy?’ blather, its what I expect to hear from ardent Republicans when talking about Iraq.

    And the ‘data sucks’ complaint is not much better. When has the data not sucked?

    Really, you can do better than that.

    Deal with the reality. The weakness was due to inventory reduction, trade timing, and weak defense spending. Real consumer spending actually accelerated a bit.

    And this is the news. The new news shows initial jobless claims falling, employment up, hours worked up. Durable goods orders have been strong.

    If we just stop cutting inventories and get on with the business of war, GDP in Q2 will be back to 2.5%, not great but good enough to keep profits growing and the stock market headed higher.

    ~~~

    BR: Its not a conspiracy — its merely a failing of the government’s modelling — All models are biased, and the gov’ts models are biased to show more growth/less inflation.

    The way the media reports it is sometimes pretty awful . . .

  9. wally commented on Jun 1

    There is a question here. We are now realizing, in no small part due to information exchange on the internet, how unreliable almost all measures of economic activity in the US are – from employment to inflation to GDP to housing sales and prices.
    Was it always this way? Are we looking at a modern corruption by political process or are we just realizing that these numbers never were reliable?

  10. jmf commented on Jun 1

    from PIMCO

    Detailed data in the Bureau of Labor Statistics (BLS) Business Employment Dynamics (BED) release, which comes out with a two-quarter lag, show employment growth of only 19 thousand in 2006Q3, while the nonfarm payroll tally for that quarter was over 450 thousand. More recently, the BLS’s more timely Job Opening and Labor Turnover Survey (JOLTS) for April – last month! – showed job openings rose only 24 thousand, with this series essentially flat since last August. The JOLTS report also showed that new hires in March (this data subset is released with a one month lag) fell 29 thousand.

    Something smells more than fishy here. Not that I’m accusing the BLS of any skullduggery. None! Rather, it is a historical fact that nonfarm payrolls – before annual benchmark revisions, which continue for six years! – understate employment early in recoveries (leading to the inevitable contemporaneous label of “jobless recovery”), while they overstate employment late in expansions.

  11. Winston Munn commented on Jun 1

    How fortuitous that both the housing bottom and the GDP bottom coincidntally occured – let’s hope this isn’t the bottom also for food prices, energy prices, and interest rates.

    There seems to be a Kubler-Ross 5 stages of grief mentality about the economy, and the initial stage is denial – it can’t get worse or we are screwed; therefore, this must be the bottom.

  12. ManhattanGuy commented on Jun 1

    Couple of positive news (atleast for tbe bulls) …

    1) Inflation falls back to Fed’s comfort zone
    Personal incomes fall for first time in 20 months

    WASHINGTON (MarketWatch) — Core consumer price inflation increased just 0.1% in April, bringing the year-over-year increase down to 2%, just inside the Federal Reserve’s target, the Commerce Department reported Friday.
    It’s the first time in 14 months that core prices have been inside the Fed’s unofficial target zone of 1% to 2%. Core inflation peaked at 2.4% in February; it was 2.1% in March

    http://www.marketwatch.com/news/story/inflation-falls-back-feds-comfort/story.aspx?guid=%7BAC83AE34%2DF414%2D45AD%2D96C8%2D668C7870C272%7D

    2) Employers Add 157,000 Jobs in May

    WASHINGTON (AP) — Employers showed a decent appetite to hire in May, boosting payrolls by 157,000, the most in two months. The unemployment rate held steady at 4.5 percent.

    http://biz.yahoo.com/ap/070601/economy.html?.v=18

    S&P 500 futures expiring this month added 5.9 to 1538.8 as of 9:05 a.m. in New York. Dow Jones Industrial Average futures increased 40 to 13,690. Nasdaq-100 Index futures climbed 8.25 to 1940.5.

    As I predicted, we will have an excellent summer rally.

  13. boy commented on Jun 1

    If everything is as bad as it looks (or worse) I guess I should be buying bonds.

  14. Scott Frew commented on Jun 1

    I too was struck by the positive spin placed on the abysmal gdp number. “Those low inventories mean gdp, like Fast Eddie, is back this quarter!” In truth, I’d expect a better number in the second quarter, if for no other reason than that cpi, as measured, is almost certainly going to be lower, due to the Owner’s Equivalent Rent calculations. That means that the subtraction from nominal to real is smaller, so real may pick up.

    Having said that, when you look at that 4.4% consumption growth that you noted, and combine it with the impending ARM reset chart that you posted yesterday, it’s hard to construct a bullish longer term argument for gdp. Consumer spending lags the housing/mortgage problem, and those resets are only beginning to kick in.

    And when you look at quarterly gdp numbers as a time series over a slightly longer horizon, the trend is pretty clear. From Q1 ’06, they go as follows: 5.6%, 2.6%, 2.0%, 2.5%, 0.6%. Hard to make that into a bullish looking chart.

    Whether you want to annualize it as 0.6%, or diminish it further by calling it 0.15%, this last quarter is already in hard landing, growth recession territory–hardly the goldilocks scenario the stock market’s placed all its chips on. Maybe the liquid refreshments the casino operators have been serving will keep participants from noticing, but the investment thesis upon which the rally has been based is disappearing fast.

  15. V L commented on Jun 1

    Barry,

    Why did you divide Q1 GDP by 4?!?

    I am puzzled as to why you are doing it.
    Are you saying that all quarterly GDP numbers heed to be divided by 4 to get “the real numbers”?

    By the way, applying the same logic to EU GDP, you should get the same 0.15% growth in Europe.

    European Manufacturing Growth Unexpectedly Slowed (secondary to US slowdown)
    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aOvSeMqnh78Y

    Japan’s Industrial Production Falls for Second Month (secondary to US slowdown)
    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aO5soeOOiBYk

    P.S. It just shows that the US economy (housing bubble) was the driving force behind this global expansion.

    ~~~

    BR: The US GDP is reported as annualized (i.e., extrapolating the Q into a full year’s data).

    The European data is reported on a quarterly basis (not annualized)

  16. Robert Cote commented on Jun 1

    Now that the headline is safely out of the way we can eventually expect the revisions with little fanfare. Federal agencies are notorious for missing changes in trend.

    I say, if inflation can be reported ex-inflation then the GDP can be reported ex-GDP. Excluding food and energy AND adjusting for popualtion growth… why just that last puts us to flat per capita economic growth. Why stop there? Adjust for inflation, ouch.

  17. michael Scumacher commented on Jun 1

    Manhattan guy-

    Usually people try to interpret data instead of just merely restating the same crap over and over again.

    Where is your analysis??

    Thought so

    Ciao
    MS

  18. costa commented on Jun 1

    Personal saving down again, personal income down again but consumer spending increased.

  19. Fred commented on Jun 1

    Ok, Barry…let’s roll up our sleeves, and make some money.

    “The U.S. economy grew last quarter at the slowest pace in more than four years. The initial GDP report of 1.3% was actually more than double twhat the updated data showed, and was 25% below economists consensus. Housing, slack capex investment, declining consumer activity all are responsible for part of the slowdown.”

    – and this is a surprise??? This has been the most telegraphed slowdown I can remember…how many Recession calls here?

    “Meanwhile in Europe, Business Investment has picked up dramatically. Europe’s economy is growing about 4X the rate of the US in Q1.”

    – Agree…also baked in. Now here’s where we sharpen our pencil and make money…where do you place your bets at this point of the cycle?

    – US$ “cheap”, so US stocks cheap on a currency basis.

    – Rates RISING in Europe – fight that trend? CB trying to slow economy down.

    – US rates in processs of “dis-inverting”…meaning growth is making a comeback (don’t need short term rate cuts)

    So here’s the INVESTMENT (not economic) question — do you make more money investing in an expensive currency/stock market entering a tightening cycle, or in a currency that sits at (long term) support, where signs show a return of growth (with core CPE under control)? Given the (backward looking) “slack capex”, you mention, and very low expectations, ANY pickup in Capex will give huge leverage in earnings. Inventory levels also point to more positive earnings going forward as well.

    We’re nearing the inflection point where foreign investors will flock here for a better “bet”, imho.

  20. michael schumacher commented on Jun 1

    Manhattan guy-

    Sorry for you not having any opinion other than what is spoon fed to you by the media.

    Thanks for you’re concern I do quite well for myself.

    when backed into a corner the questions about the size of one’s wallet are always brought up. Thanks for sticking to the stigma of XXXXXXXX ……you fit the bill perfectly

    Ciao
    MS

  21. ManhattanGuy commented on Jun 1

    XXXXXXXXX? Why is that anytime I say something positive in this blog, people call names? Is this a way for you to defend yourself?

    Again sorry for your situation. You do sound like a loser to me!!

  22. Aaron Byrnes commented on Jun 1

    I remember reading that there was quarterly jobs data which was an actual survey with a very large sample. Can someone tell me about any jobs data which is a count of jobs?

  23. s0mebody commented on Jun 1

    Thanks jmf,

    FWIW birth/death addition this month was 203,000 jobs.

  24. The Financial Philosopher commented on Jun 1

    In my view, the big picture premise is to question economic reports (especially those coming from the federal government) and come to our own conclusions based on smart, strategic, and sound research. I believe some of us here are beginning to get frustrated and are scratching our heads as to why the federal government and the investor masses are pushing this market further.

    I thought we were more intelligent than that! The disconnect between reality (as discussed on this blog and other intelligent blogs) and perception (of fools rushing in the market) should come as no surprise. The market is running on momentum, not fundamentals. The smart investor should be able to say, “who cares?” in any market environment. Timing the market is a fools game. “Time in the market” with a strategic asset allocation based on macro-economic signals is prudent. We should always have one foot in the present and one foot in the future…

    The market is obviously signalling the latter stages of a Bull run. The economy is also signalling the final stage before recession. Current market behavior has been repeated over and over. The only challenge is that we do not know how long this final run will last. That’s never changed. We should stop beating our heads against the wall and thank God for our intelligence, knowledge, foresight, and resolve. Meanwhile, those of us with long positions that are benefitting from this run, should be thankful while simultaneously and slowly shifting assets to prepare for the next stages of market and economic cycles…

    Kent (aka The Financial Philosopher)

  25. michael schumacher commented on Jun 1

    If you’re going to sling shit you better be prepared to get some on yourself.

    Question anyone’s financial prowess is like ringing the dinner bell to be insulted. Sounds like this has happened to you before.

    “sounding like a loser” is alot different than being one like yourself…but I guess you know that since you seem to know everything else after the fact.

    Ciao
    MS

  26. kharris commented on Jun 1

    So far, data in hand suggest Q2 will be better than Q1, but that remains iffy. So far, personal spending seems likely to make a smaller contribution. There is good reason to think the crash in inventories in Q1 got the overhang tidied up, and inventories will add to growth in Q2. Housing will detract less.

    It is entirely possible that we’ll have a couple of super spending months, though the MEW/real disposable income/gasoline price problem suggests otherwise. Those factors suggest a below-average pattern of spending for summer.

    Given the pattern of commentary evident in the press and among most bank economists, a better Q2 growth figure will be met with crowing. Forecasts are for a better Q3, but that is now the riskier quarter, I think. That’s in part because we have enough data to refine forecasts for Q2. More important, new mortgage regulation go into effect at mid-year, and there will have been more time to adjust household spending plans to straightened circumstances.

  27. Integral Barry commented on Jun 1

    Three myths of Scarcity…

    1) There’s not enough

    2) More is better

    3) That’s just the way it is

    These premises “own” us, and are responsible for the rampant “poverty of the soul” amidst the US and most modern cultures.

    There is global shift in consciousness underway, a massive movement that does not receive media attention (nor need it be).

    Most conflict/friction we see today is an unconscious/conscious resistance to this shift, this change-evolution of consciousness.

    Get out of the way, let go of fear, trust enough to love yourself, to know your authentic self. Smile & risk believing in the abundant nature of the Universe. See what changes take place when you do this.

    Sometimes you have to fall apart to fall together.

    Have a great day

  28. Winston Munn commented on Jun 1

    The world is awash in liquidity (debt ingeniuosly termed liquidity to seperate it from real money and wealth)driven by the trade deficit of the U.S. which causes huge monetary expansion when dollars gained must be exchanged by printing more Yuan, Yen, and Euros. This monetary inflation is fueling equity inflation.

    The problem with the scheme is that it takes more and more debt to sustain it. As the Fed seems loathe to address the problem of equity inflation by tightening money supply, it looks more and more like Paznzer will be right that it will be global meltdown caused by an “event” that will finally halt the show.

  29. Christopher Laudani commented on Jun 1

    Hey Barry,

    Why doesn’t President Bush appoint Paul Wolfowitz as head of the Commerce Dept? (He’s out of work now, right?)

    If he did that, I’m sure we’ll see a marked improvement in the gov’t statistics and the performance of the economy.

    Wolfie could figure out a way to boost our GDP numbers. A couple of 10% GDP quarters would be a win-win for everybody! People who are unemployed could be counted as employed. Cars counted as unsold would be sold and imports could be counted as exports.

    That way we wouldn’t have to worry about the economy so much. We could all have a nice relaxing summer, knowing that the economy is on fire! The stock market would add a couple of thousands points, people would feel richer and spend more.

    Perhaps he could reduce the number of people uninsured too. Make those poor bastards feel better too.

    What’s so bad about that? Now that’s what I call Right on America! wooohoooo!

  30. Fred commented on Jun 1

    Kent…respectfully, I couldn’t disagree more with this:

    “The market is obviously signalling the latter stages of a Bull run. The economy is also signalling the final stage before recession. ”

    See my post above.

    An inverted yield curve that has now “dis-inverted” hardly suggests a recession, or a late cycle. A “corrected” currency at long term support, suggests a continuation on earnings surprises. A RECOVERY in the economy with inflation under control suggest a much earlier cycle phase to me.

  31. V L commented on Jun 1

    Well, it looks like we are during the secular bull market, at least this is what the mob believes (look at the Dow and S&P 500 long-term charts)

    Here are some of the rules of trading for the days like today (from Dennis Gartman’s Rules of Trading)

    “2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.”

    “3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.”

    “14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.”

    “17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are “right” only 30% of the time, as long as our losses are small and our profits are large.”

  32. michael schumacher commented on Jun 1

    there fred goes with the the tired old “Capex will save us” arguement.

    if the economy is recovering then why are almost all the economic indicators at or below recessionary levels?

    Inflation under control???

    Hahahhahahahahaha

    Too funny?? Have you driven anywhere lately?? or eaten anything??

    I guess not since it’s under control according to you.

    That bridge you bought the other day would go great on the swamp you are peddling today.

    Ciao
    MS

  33. Nova Law commented on Jun 1

    It wouldn’t be a Non Farm Payroll Friday without Barry’s usual “the glass is half empty” analysis.

    But no Schleprock for me today. The sun is shining, my portfolio continues to march northward, and all the doomsayers continue to lose their money betting short. Heck, even my own QID position got stopped out a week ago. For the continuing vigor of the stock market I’m going to have to buy some back.

  34. Fred commented on Jun 1

    Lol

  35. mhm commented on Jun 1

    Nova, what we discuss here is our perceived reality versus the alternative reality of government statistics. Nobody claims or even suggests going short/long on anything.

  36. Barry Ritholtz commented on Jun 1

    If you people were so bold as to include your real email addresses, I might be persuaded to mail the Subscrption-only stock selections / portfolio ideas that are not for public dissemination.

    I know, its easier/cowardly/less spam to post fake addresses — step up and come out from beyond your veils.

    You should be able to find my address here . . .

  37. TexasHippie commented on Jun 1

    What’s keeping the risk spreads so low, manipulation or genuine confidence?

    Also regarding CapEx discussions it seems that M&A activity is telling us that the larger companies would rather buy than build. Even those with large cash reserves are taking advantage of liquidity. Are there any signs that large companies will start leveraging easy money for anything other than stock buybacks and takeovers?

    Whither organic growth?

  38. Marc commented on Jun 1

    Yeah, I always hate it when I read Bloomberg and they have headlines with the word “may” in it. Like “Housing may have bottomed” or “this may be the low point in the economy”.

    I always thought financial news is about what is and not what may be…call me skeptical

  39. michael schumacher commented on Jun 1

    MHM-

    therein lies the problem. Several people here have decided that if you do not agree with there perma bull stance then YOU MUST BE SHORT.

    Pretty sad reality for those fellows.

    All a matter of time before they get theres anyway. Always happens

    Ciao
    MS

  40. Econbrowser commented on Jun 1

    Don’t worry, be happy

    Yesterday the Bureau of Economic Analysis told us that first-quarter real GDP grew not at the anemic 1.3% annual growth rate as was originally reported in the “advance” es…

  41. Eddie commented on Jun 1

    I’ve read this blog for over a year now. From day 1 it was filled with bears. If I had listened to the advice given, I would have missed out on all the returns delivered by the market this past 1+ years.

    Yes, you guys will be right one day — stopped clock and all. But until then, why are you all so antagonistic toward any bull that (correctly) comes in a points out your errors?

    Sheesh.

  42. mhm commented on Jun 1

    I was checking my email for the portfolio tips and so far I got only the “via-gra professional powerpack” offer whatever that means… lighten up folks it is Friday afternoon.

  43. michael scumacher commented on Jun 1

    eddie-

    Because, like your post, it is devoid of any analysis or interpretation. It is merely pointing to a stock market with one finger and saying “see, I told you”.

    I still fail to see what I or the rest of the so-called perma-bears have been “told” as to why it continues up in the face of lowered economic activities.

    Commerce and Labor dept. trickery will only last for so long. It seems that none of you who “correctly points out mistakes” ever offer up any anecdotal or empirical evidence of why we are wrong and you are right.

    This blog correctly uses economic indicators that many of you have utilized in the past to be successful….so now they are not correct because you are “right” and we (who are still using the same ones) are wrong.

    Selective understanding is what you are displaying. I’m sure you have no problem with back dating options since you are becoming personally enriched by that sad fact of reality within our country.

    I’ve heard that logic used time and time again…..alot like the perma bull arguement here.

    Ciao
    MS

  44. VJ commented on Jun 1

    From ‘Grant’s Interest Rate Observer‘:

    THE CURIOUS SURGE IN MONEY SUPPLY

    “The yield curve is flat, the Federal Reserve is unaccommodative and the residential mortgage market is constricted. Yet growth in the broader measures of money supply is quickening, M-2 and MZM to the fastest rates in four years. ‘The discontinued M-3, which is kept alive on the blogosphere… is supposedly growing at double digits’.”
    .

  45. TKL commented on Jun 1

    Gotta admit I wish I’d taken the money from selling my house and put it in stocks. On the other hand, losing 25% of the family’s real-estate winnings in a recession would have been rather irksome. A few questions for the readership:

    Have the chances of recession faded with the rising yield curve? Specifically, does the yield curve right itself before, during or after the onset of recession?

    Can we avoid recession despite a major decline in housing, a major spike in oil, and 4-plus below-trend quarters of GDP, each of which has independently been a reliable predictor of recession in the past?

    Regarding today’s reports, why is there so little talk of the scary details about falling incomes? The income column in the BEA data table is strewn with negative signs. Combined with the modest increase in spending, the result is that the savings rate, which had become a little less negative, is once again sharply negative. I’m supposed to buy stocks on the assumption that profligates will be able to continue their profligacy? (I know, I know, the savings rate doesn’t include stocks, home equity, etc., but my understanding is that it never did, so comparing apples to apples, it seems we are indeed spending like drunken sailors, and that the end game could be painful.)

  46. bodanker commented on Jun 1

    An inverted yield curve that has now “dis-inverted” hardly suggests a recession, or a late cycle.

    Fred, I respectfully disagree. Most research shows that an inverted yield curve leads recessions by 2-4 quarters, by which time the yield curve had usually reverted. I haven’t seen any research investigating reverting yield curves leading non-recessions.

    This graph shows the 3-month to 10-year Treasury spread went negative in mid-2006. That would historically imply a recession starting in early/mid-2007.

    John Fernald, Bharat Trehan
    FRBSF Economic Letter
    2006-32; November 24, 2006
    http://www.frbsf.org/publications/economics/letter/2006/el2006-32.html

    Jonathan H. Wright
    Finance and Economics Discussion Series
    The Yield Curve and Predicting Recessions
    http://www.federalreserve.gov/pubs/feds/2006/200607/200607abs.html

  47. Estragon commented on Jun 1

    If find the whole bull/bear thing a bit tiresome. Seems like a concept dreamt up by testosterone fuelled brokers and the media to interest the public in what can be a rather dry subject, and to get them to feel good about ignoring risks.

    Go team.

  48. LAWMAN commented on Jun 1

    I’m long this market until MS throws in the towel.

    I just looked up the definition of “bunker mentality”. MS, your picture was right there, next to El Jefe’s.

    What the “bulls” here don’t understand is how the analysis on this site can be “right,” when the analysis constantly points to the market crashing for a hundred different reasons. That analysis may be “right,” but if you followed it to its logical conclusion, you would not be long the market, and would have missed out on 25% gains over the past 18 months.

    MS, where does all your “thoughtful interpretation” get me? Into bonds?

    As for your “ancedotal” and “empirical” evidence: last I checked the DOW and S&P 500 were at all time highs.

  49. TexasHippie commented on Jun 1

    Eddie, the oft-stated purpose of this blog has been to bring attention to understudied indicators and to question the media when it takes a uniform, unquestioning stance on the markets and economy. Right now the bulls are singing loudly, and rightly so according to folks like yourself; that’s why discussion here appears bearish when serving as a thoughtful counterbalance.

    I don’t recall ever seeing a bull lambasted on this blog for the data and analysis they provide when it goes beyond the usual media crib sheets. But talking-points and unsupported opinions from either side have no place here.

  50. Greg0658 commented on Jun 1

    Heres the data point I caught that matters to my friends 33.9 hour work week on average. Thats usually 48 to 60 for CNC operators and 20 to 30 for burger flippers.

    Paying benefits or Not is paramount.

    This plan provides 3 jobs to 1 for the stats benefiting business and government.

    The retail market gets nesters from fatigue and mall walkers and bloggers.

  51. RobH commented on Jun 1

    Anybody like to comment on the fact that according to the BLS the US has 25k more people working in Real Estate in May 07 (not rental/leasing) than it did in May 00 (seasonally adjusted figures)? It’s about 1-2% increase.

    Does that make sense to anyone?

  52. RobH commented on Jun 1

    Sorry that’s May 06 not May 00

  53. Estragon commented on Jun 1

    TKL – FWIW, my take on the personal spending thing…

    First, like most of these releases, the data are subject to substantial revision so we shouldn’t rely too much on the initial high-frequency numbers. That said, the trend has been negative for a long time.

    I don’t like the idea of including capital gains (realized or otherwise) in personal income/savings. Not because the gains aren’t real (they may well be), but because they don’t represent income or savings in the personal sector. To the extent they represent income retained by the corporate sector, they are corporate savings. If and when these savings are transferred to the personal sector through dividends, they are captured as personal income. To the extent gains are not corporate savings, but are just a rise in demand & price for the stock, the gains are real for an individual, but not for persons in aggregate. The “gain” realized is just a transfer of savings from one person to another.

    What IS missing from the calculation of personal income is buybacks. In making a buyback, the corp sector either depletes cash or issues debt. In either case, the sector is transferring savings to the personal sector to the extent the buyback price exceeds book share value.

    In other words, I think buybacks explain some (but not all) of the deteriorating personal savings trend.

  54. Nova Law commented on Jun 1

    How could I possibly turn down a kind offer like that from Barry?

  55. michael Schumacher commented on Jun 1

    and right on cue LAWMAN misses the point…

    See he even points to the stock market as all the evidence HE needs.

    Expected…

    Ciao
    MS

  56. Fred commented on Jun 1

    Barry…I’m not sure if your comment is directed at me…but I find your work very thought provoking. Sometime I agree. Other times I’ll offer an alternative view. If these are comments you’d rather not see, I’ll refrain. I hope that’s not your intetion/feeling. I read many websites, that I don’t take as bible, to help sharpen my inventment process. Yours will always be near the top…even if I disagree with some of it.

  57. Idaho_Spud commented on Jun 1

    To get back on topic, I agree with Barry that the media poured oil on the troubled waters of a really alarming GDP report.

    The trend is *not* your friend right now, so bottom-calling GDP shows pretty lame mental processes at this point.

  58. Fred commented on Jun 1

    Bodanker…I agree with the closing paragraphs of one of your references:

    “A more concrete reason to be cautious about this forecast lies in the recent behavior of long-term rates, which argues for reducing the weight one places upon the term spread and relying upon other variables when making forecasts. The Dueker model provides one way of doing so, and its forecast (based on data through August) is noticeably more optimistic. However, deciding what to include brings us back to the problem discussed by Stock and Watson: The forecast we get depends on the indicators we add to the term spread. In particular, adding data on the housing sector is sure to lead to more pessimistic forecasts.

    That said, our review of the available surveys, indicators, and model forecasts leads to estimates of the probability of recession that are all lower than the one based on the term spread and the yield curve. Furthermore, financial markets exhibit little evidence of distress: the Dow has hit record highs recently, and various risk spreads (such as the rate on corporate bonds relative to Treasuries) remain at low levels. Taken together with our inability to explain the unusually low level of long-term rates, this suggests to us that while the probability of recession might have gone up somewhat in recent months, it is not yet at worrisome levels.”

    IMHO, rates inverted because the global financial fabric has changed — emerging economies, and their reserves were boosted by the strong global commodity demands, and millions of new consumers. Global rates plunged, making our rates attractive — relative to the risks. The conundrum is foreign demand desiring our bonds.

  59. skateman commented on Jun 1

    The above discussion made me think of two quotes from Fooled by Randomness:

    “Judge performance not by the results, but by the costs of the alternative (i.e. if history had played out in a different way). $10 million earned through Russian roulette does not have the same value as $10 million earned through the diligent and artful practice of dentistry.”

    As an extreme example, those putting money into the Chinese stock market in 2007 have done tremendously, but they could have been down huge, and probably, ultimately, will be.

    “At any point in time the richest traders are often the worst traders. This, I will call the cross-sectional problem: At a given time in the market, the most successful traders are likely to be those that are best fit to the latest cycle. This does not happen too often with dentists or pianists – because these professions are more immune to randomness.”

    Is the average Chinese stock investor up 3-fold over the past couple years the “best” trader? The likelihood is that he’ll give it all back and then some, proving himself to be the worst trader.

    The Chinese stock market is obviously an extreme example, but given that we seem to be in a global bubble, I think the lessons may be applicable across much of the investment landscape right now.

  60. ManhattanGuy commented on Jun 1

    MS – go back to school and learn some manners .. you pathetic fool!! If I followed you or any other bear’s advice. I would be broke by now. Instead I am up 100% since Sep ’06. How about that for a return?

    BR – No, I don’t have any published/audited track record. But I see that majority of your posts are bearish. You consistently ignore any positive news on the economic front. Maybe we should call this blog “Wrong picture” instead of “Big Picture”??

  61. bodanker commented on Jun 1

    Fred, I had a feeling you’d latch onto that. ;) I’m going to refresh the analysis of the second reference and post it to my blog this weekend. I’ll email you when it’s posted – if your email is valid…

    However, my point still stands that I haven’t seen, nor have you provided, evidence that the reverting yield curve is evidence of lowered probability of recession.

  62. skateman commented on Jun 1

    Up 100% in less than one year? You must be taking some ungodly risk. Know what the compound rate of return is for up 100% a year for 3 years in a row and down 100% in year 4?

  63. Fred commented on Jun 1

    ” nor have you provided, evidence that the reverting yield curve is evidence of lowered probability of recession.”

    Of course, you’re correct…we’ve never had a similar historical global economic change as we’ve experienced the past few years — “Flat World”. I won’t use the dreaded, “It’s ******** this time”. That’s why this variant view is so powerful (and profitable).

    I did see an interesting parallel laid out by Loise Yamada — that today’s global explosion is similar to post WWll. Now there’s a powerful thought for a thread!

  64. Fred commented on Jun 1

    ” nor have you provided, evidence that the reverting yield curve is evidence of lowered probability of recession.”

    Of course, you’re correct…we’ve never had a similar historical global economic change as we’ve experienced the past few years — “Flat World”. I won’t use the dreaded, “It’s ******** this time”. That’s why this variant view is so powerful (and profitable).

    I did see an interesting parallel laid out by Loise Yamada — that today’s global explosion is similar to post WWll. Now there’s a powerful thought for a thread!

  65. Fred commented on Jun 1

    ” nor have you provided, evidence that the reverting yield curve is evidence of lowered probability of recession.”

    Of course, you’re correct…we’ve never had a similar historical global economic change as we’ve experienced the past few years — “Flat World”. I won’t use the dreaded, “It’s ******** this time”. That’s why this variant view is so powerful (and profitable).

    I did see an interesting parallel laid out by Loise Yamada — that today’s global explosion is similar to post WWll. Now there’s a powerful thought for a thread!

  66. Fred commented on Jun 1

    sorry for the dupe posts.

  67. Peter Boockvar commented on Jun 1

    Monthly job growth in payrolls averaged 212k in ’05, 188k in ’06 and 133k ytd.

    And has avg just 119k over past 2 months

    The spin on things is truly amazing

  68. Jrs commented on Jun 1

    What Me Worry? All is Fine and all Commerce Numbers are reliable.

    Alfred E Newman and George W

  69. ryan commented on Jun 1

    Hi Barry! Love the blog. I apologize for the fellow members of my bullish herd who lob insults at this blog. I think it’s great. And I know it actually is possible to be cautious and very profitable at the same time. Would love to have you send me some info. Real email: dirtysexymoney@aol.com

  70. Idaho_Spud commented on Jun 1

    All news is good news (earning less but spending more) Itsallgood:

    AP
    Incomes Fall but Spending Increases
    Friday June 1, 8:50 am ET
    Consumers’ Incomes Fall in April, but Spending Increases

    WASHINGTON (AP) — “Consumers’ incomes dipped in April but that didn’t stop them from spending briskly. The Commerce Department reported Friday that personal incomes fell by 0.1 percent in April, following a robust increase of 0.8 percent in March.
    Consumers’ spending — a key ingredient to a healthy economy — rose by a strong 0.5 percent in April, following a 0.4 percent gain in the previous month.

    The spending figure was stronger than the 0.4 rise economists were expected. But the incomes figure was weaker; economists were calling for a 0.3 percent rise.”

  71. michael schumacher commented on Jun 1

    Manhattan Guy-

    I’ve given nothing that can be construed as advice.

    There you go with the “mine’s bigger than your’s” arguemeent-which is always offered up in light of any real intelligence or analysis. You and Fred are perfect for each other. Put the blinders on on hold on.

    Hope you have a room big enough for you and your ego.

    Ciao
    MS

  72. Estragon commented on Jun 1

    Fred – another parallel may be Britain around 1900.

  73. Fred commented on Jun 1

    Interesting Estra…I assume you mean for the USA. That sounds like the Dem’s ’08 platform. ;o)

    Louise was referring the the global growth boom…similar to post WWll.

  74. TKL commented on Jun 1

    Estragon — Thanks for your ideas. I hadn’t thought about the effect of corporate buybacks or earnings retention on the personal savings rate. But dividends and other passive income did not contribute to today’s negative personal income data. To the contrary, dividend income made the single biggest positive contribution to incomes. The biggest negative was in the “other services” segment of private industry.

  75. Estragon commented on Jun 1

    Fred – “That sounds like the Dem’s ’08 platform. ;o) ”

    Hmmm, the British Labor party was formed in February 1900, following which there were an increasing number of strikes etc. We’ll see ;-)

  76. m3 commented on Jun 1

    fred-

    – and this is a surprise??? This has been the most telegraphed slowdown I can remember…how many Recession calls here?

    were already in recession. if inflation were calculated properly, the data would show we’ve been in a recession for months.

    – US$ “cheap”, so US stocks cheap on a currency basis.

    this means nothing. stocks do not rise b/c they are cheap. stocks do not fall b/c they are expensive. that is like saying “oranges are orange.”

    – Rates RISING in Europe – fight that trend? CB trying to slow economy down.

    they are trying to slow down inflation, not the economy. there is a difference.

    – US rates in processs of “dis-inverting”…meaning growth is making a comeback (don’t need short term rate cuts)

    when this happens, the shoe finally drops and we go to recession. the yield curve inversion is a LEADING indicator, not a coincident indicator.

    So here’s the INVESTMENT (not economic) question — do you make more money investing in an expensive currency/stock market entering a tightening cycle, or in a currency that sits at (long term) support, where signs show a return of growth (with core CPE under control)? Given the (backward looking) “slack capex”, you mention, and very low expectations, ANY pickup in Capex will give huge leverage in earnings. Inventory levels also point to more positive earnings going forward as well.

    this is a macro blog, not a trading blog. if you are taking investment advice from a internet blog, you are insane. a true investor would take the same actions and strategy during a recession or recovery. if you want to talk trading, take it to a trading blog.

    We’re nearing the inflection point where foreign investors will flock here for a better “bet”, imho.

    yeah, well… we’ll see…

  77. jack commented on Jun 1

    Can someone educate me how this economy slowdown is similar/dissimilar to 1994/1995 situation?

  78. Fred commented on Jun 1

    m3:

    “were already in recession. if inflation were calculated properly, the data would show we’ve been in a recession for months.”

    — A recession has nothing to do with inflation…it’s GDP.

    US$ “cheap”, so US stocks cheap on a currency basis.

    this means nothing. stocks do not rise b/c they are cheap. stocks do not fall b/c they are expensive. that is like saying “oranges are orange.”

    — You completely missed my point — the DOLLAR is cheap — way down from “expensive” levels. So a European can buy our stocks “cheaply” with expensive currency.

    US rates in processs of “dis-inverting”…meaning growth is making a comeback (don’t need short term rate cuts)

    when this happens, the shoe finally drops and we go to recession. the yield curve inversion is a LEADING indicator, not a coincident indicator.

    – AGREE! The inverted yld curve predicted this slowdown…and the dis-inversion is PREDICTING THE RECOVERY!. The difference is this inversion was from different causes (see my comments above)

    this is a macro blog, not a trading blog. if you are taking investment advice from a internet blog, you are insane. a true investor would take the same actions and strategy during a recession or recovery. if you want to talk trading, take it to a trading blog.

    -again AGREE…I never said anything about trading. I did talk about investing.

    Have a nice weekend.

  79. Estragon commented on Jun 1

    Jack – IMHO, the single biggest difference is that the US wasn’t borrowing roughly $65billion/month from the rest of the world during the so called “good times”, and household debt service was around 11% of disposable income vs nearly 15% today.

  80. Estragon commented on Jun 1

    Fred – “– A recession has nothing to do with inflation…it’s GDP.”

    Ummm… I think GDP is reported in REAL terms. That would be nominal minus inflation. In that sense, if inflation is higher than reported, GDP would be lower than reported.

  81. Juan de la O commented on Jun 1

    Word for the day: semiautonomous

    (which may help some in their consideration of real economy v markets)

  82. RW commented on Jun 1

    “…growth in the broader measures of money supply is quickening, M-2 and MZM to the fastest rates in four years. ‘The discontinued M-3, which is kept alive on the blogosphere… is supposedly growing at double digits’.”

    And as long as this is true, markets prices will probably continue to rise. There is a reason the Chinese (and others) become mad for stocks: Like the Weimar Germans (and others) it is the only way an average citizen has to maintain purchasing power in a country attempting to evade the consequences of debt.

    Accelerating systems generate heat and become more accident prone, imagined as a simple curve of possible outcomes the overall shape becomes platykurtic — the tails grow fatter, the peak falls — it is one thing to own a portfolio w/ a 70% chance of 15% gain and 30% chance of 10% loss and quite another to own a portfolio w/ a 60% chance of 10% gain and 40% chance of 30% loss.

    It is neither bullish nor bearish (epithets aside such labels lack meaning in any case) to recognize when the current environment places ones asset mix in the latter category rather than the former.

  83. TKL commented on Jun 1

    Jack — A few differences between now and 1994-95:

    1. In 1994-95, the housing bust that began about 1989 had run its course and housing was emerging as a powerful positive contributor to economic growth. Now, the housing bust has just begun and should be expected to continue for about three or four years. To the extent that the 1989 bust contributed to the 1990-91 recession, similar consequences can and should develop this time too. Steep housing declines have regularly been followed by recessions.

    2. In 1994-95, oil prices were fairly stable in the high teens per barrel, except for a temporary rise to the mid-20s that quickly abated. Now, there’s been a secular, unabated rise from about twenty to sixty-something. Steep increases in oil prices have regularly been followed by recessions.

    3. Unless you’re really young, you’ll remember what it was like when that internet world web thing came along. Seemed kind of doubtful whether it would matter much. Sears already had its Prodigy service, which hadn’t exactly caught fire. Fair to say the internet caught fire. It turned out to be, shall we say, inspirational for investors.

    4. Although it remains to be seen, the chance that we might repeat the experience of the mid-’90s will depend in large part on whether we become willing to pay a lot more for a dollar of earnings than we have been. Most of the stock market’s rise during the great bull market of the ’80s and ’90s was due to multiple expansion — increasing P/Es. With earnings growth on the wane, continued stock-market strength depends in part on whether we become ebullient about stocks again. Is that possible? So soon? Beats me, but I got a little nervous when I heard talking heads start calling last summer for multiple expansion to replace earnings. Too bad for me, ’cause so far they’ve been right. I shoulda bet the house on it. And I shoulda shorted PurchasePro in ’00, bought gold in ’01, and put all my money on the Colts in the Super Bowl.

  84. Si commented on Jun 1

    Strange days indeed. I think wether we like it or not we are suffering from the fact that we have a bunch of policy makers who do ‘make stuff up’, lets face it they have told us some whoppers in the recent past…not in the financial arena but still..
    If their models are wrong well, i’m sure they damn well know about it.
    Currently the only maket that seems to want to argue about it is the currency market….the dollar is rapidly turning into monopoly money although fixed income is waking up slowly.
    My question though is when does the weak dollar become a real positive for the US economy, surely its gonna spur some expansion in manufacturing etc. My feeling is the powers that be want the weak dollar to get themselves out of the shit, they are just hunkering down and hoping they can get through this rough period with a bit of rough data. I imagine they are happily surprised at how the equity makets have taken the ball and are running with it.

  85. Frankie commented on Jun 2

    Well, speaking of a “weak dollar”, and 1994-1995 — the dollar is at the same levels as it was then. So the obvious qustion is, was the dollar a “beleaguered and weak” currency then? Perhaps this is a major factor in the market’s success of that period, as now.

  86. naked emperor commented on Jun 2

    70% of the economy, personal income and spending, continues growing a solid 3.5% year-on-year, despite the housing market downturn

  87. TKL commented on Jun 4

    Jack — I doubt you or anyone else will read this much-belated additional reply to your question about differences between now and 1994-95, but my prior reply should have included one more potentially big difference:

    The yield on 10-year treasuries fell from just under 8% in late 1994 to about 5.65% at the beginning of 1996. For adherents of the Fed model, that permitted stocks to expand from a fair-value P/E of 12.5 to a fair-value P/E of 17.7, thus justifying a 50% run-up in stock prices.

    For a while it looked like something similar might be happen beginning in the current rally, as 10-year yield fell from about 5.25% last summer to about 4.5% at the end of the year. But the 10-year has since moved back close to 5%, a bigg difference from 1994-95.

    In the bigger picture, the yield on the 10-year is now at a crossroads. It appears to be continuing an uptrend that began in 2003, and challenging the secular downtrend that began in the early 1980s. Again, quite different from 1994-95.

Read this next.

Posted Under