The Advance GDP report was released today, and it came in at half of the 1.2% consensus: 0.6%. This is a measure of Real growth, and is supposed to be adjusted for inflation.
A few highlights of the data:
• Consumption slowed to 2% from 2.8% in Q3; I suspect that only partly reflects real growth, meaning its partly inflated by price rises;
• U.S. exports continue to increase: Up 3.9% for the Q. Overseas trade added nearly half a point to Q4 GDP;
• Overall, the US economy grew 2.2% for the full year 2007 — the slowest since 2002 (1.6%)
• Inventory build, which drove the 4.9% Q3 data, was totally absent. It sliced 1.25% from GDP, after adding nearly a point in Q3.
• Inflation remains sticky: Price index for personal consumption expenditures rose by 3.9% in Q4 after a tepid 1.8% in Q3. This was the second highest PCE # since 2001
• Q4 business spending rose 7.5%. Investment in structures
went 15.8% higher (which seems an awful lot to me); Equipment/software purchases rose by 3.8%.• Biz spending decelerated in the fourth quarter from Q3’s hotter 9.3%.
None of this is a surprise to us, but I have two takeaways:
1) The Fed is likely to cut 50 bps today.
2) If we do, as my odds suggest, have an official recession, it likely hasn’t started yet, at least according to the traditional measure: Two consecutive quarters of contracting GDP.
However, there are other ways to measure a recession. As to the official definition of what a recession is, consider Jeff Saut’s comments earlier this week:
"The most accurate definition is proffered by the National Bureau of
Economic Research (NBER) that frames it this way: “A recession is a
significant decline in economic activity spread across the economy,
lasting more than a few months, normally visible in real GDP, real
income, employment, industrial production, and wholesale – retail
sales. A recession begins just after the economy reaches a peak of
activity and ends as the economy reaches its trough. Between trough and
peak, the economy is in an expansion. Expansion is the normal state of
the economy; most recessions are brief and they have been rare in
recent decades.” Rare indeed, as seen in the recession charts we
included in last week’s report and have attached again this week.By studying the charts, one observes that until recently recessions
have been a normal conclusion to the business cycle. As seen, however,
recently this has not been the case. In past missives we have railed at
the central banks, as well as the politicians, for their continuing
efforts to prevent the normal business cycle from playing. They did it
again last week when the Federal Reserve panicked and cut interest
rates by 75 basis points with a concurrent $150 billion economic
stimulus package from the politicos. And if this is a typical
recession, such maneuvers will likely ameliorate the downturn. But,
what if this isn’t “your father’s typical recession?”
As always, thats smart stuff from Jeff.
Q4 2007 GDP
graphic courtesy of Barron’s econoday
Note that this is the first of 3 GDP releases, and may subsequently be revised up or down.
Sources:
GROSS DOMESTIC PRODUCT: FOURTH QUARTER 2007 (ADVANCE)
BEA/Commerce Department, January 30, 2008
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
“Not your father’s typical recession?!”
Raymond James & Associates,, January 28, 2008
http://www.raymondjames.com/inv_strat.htm
U.S. Economy Expanded 0.6 Percent, Less Than Forecast
Shobhana Chandra
Bloomberg, Jan. 30 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aI8xDNevVoxQ&
GDP Growth Slowed in 4th Quarter, As Housing Continues Its Drag
JEFF BATER
WSJ, January 30, 2008 10:05 a.m.
http://online.wsj.com/article/SB120169953721828519.html
Shouldn’t the Fed have done all their lowering in last week’s announcement? Nothing they do now will surprise me, however. Rather than a seaworthy captain with steady hand on the wheel, we’ve got a magician pulling rabbits out of his hat when we least expect it. I find the Fed’s use of the “surprise” element very unprofessional and very unsettling.
Go to John Williams ‘Shadow Gov. Stats’ and use the pre Clinton measured rate of inflation and adjust the reported GDP accordingly. We have been in a recession for quite some time.
If you truely believe the contrived and hedonistic PCE stats then congratulation, YOU’RE not in a recession. Sucka…
We go from 4.6% to .6% in one quarter?
Sure…….you know if they didn’t spend the last half of the year in complete and total denial then they may have actually been able to do something construc……..
Yea right!!!
Ciao
MS
Ross,
Damn, you beat me to that post.
A great post would be a reconciliation of the huge gaps in data such as a stinko GDP, yet weekly unemployment claims and perpetually higher than expected employment rates. There is such a disconnect between the weekly unemployment claims and this GDP figure that a full accounting reconciliation needs to be undertaken.
I think it was on BP where I read that Q3 was distorted because oil prices spiked so fast during quarter. That put a lot of money on the import side but the inflation had not rippled through enough to be caught by the deflater. I think I remember the deflater being at some historic low of ~0.8 for Q3. So do you think that eventual price carry over is at least part of the issue here with Q4?
RealTime Econ Blog at WSJ points out:
“Real gross domestic product grew at a 0.6% annual rate, well below the 1.2% consensus. But most of the surprise was in inventories, which actually declined. ”
While here it’s noted: “Inventory build, which drove the 4.9% Q3 data, was totally absent.”
I think it’s often better to get information from diverse sources — “absent” doesn’t contradict “decline” but it’s….not the same, is it?
Very lean inventories have implications of course.
Stuart,
I don’t believe anything from the government at this point. There are 2 things I need to know. First, we have a massive debt bubble bigger than in 1929, caused mainly by the biggest housing bubble of all time that is 60% higher than anything ever seen in the US according to Shiller. Second, for months, stocks have rallied on weak volume and tanked on big volume. That data cannot be manipulated. Stocks will correct to at or below one times sales of 900 per share (my estimate), which anyone can do the math…900 on the S&P. That’s best case scenario.
lean inventories, Fed pumping in liquidity, & the most telegraphed recession or slowdown in history.
Barry question!
As the fed inflates us out of this mess, and continues to take FFR down in the months to come, how does this affect the next fed cycle?
What I mean is, with such actions both in monetary policy, term auctions and govt stimulus, chances are we are going to over stimulate. Commodities will surge and we will probably see a strong 2009-2010..all this assuming the actions stabilize the fire fueled by housing and the financial ills that resulted.
How quickly will fed have to take these measures back? Once the fed reaches bottom, which we wont know until after it got there, do you see:
a) it staying there for a while/ A key argument against Greenspans decision when FFR went to 1%
b) being taken back rapidly via a few quick shots of rate hikes to curb runaway inflation?
No way the fed hits it perfectly given the size of stimulus. Curious on thoughts about this that we obviously will deal with in future
I have no idea what they will do, but anything less than 100 basis points is a Fed still behind the curve. It may be that FF will end up at 1% before this is all over.
For those of you who worry about inflation… money, credit and wealth are being destroyed every day in a way that will eventually turn the tide on inflation. It’s the risk imposed on the f-i-n-a-n-c-i-a-l system itself right now that is the Fed’s bigger worry… a far bigger worry than this lower than anticipated GDP and the Walking Around Economy (W.A.E.).
Were they to do 175, it wouldn’t surprise me at all. The only thing that would surprise me would be if they raised.
Go to comics.com and get the latest Steve Pastis ‘Pearls Before Swine’ strip. I’m not shilling for Pastis but he was a lawyer that went straight.
Surreal strip. It deals with the ‘little guy’.
Eclectic-
Please elaborate on this statement of yours:
>>but anything less than 100 basis points is a Fed still behind the curve.>>
from the standpoint of it making one damn bit of difference excepting the PM’s of the banks.
I’m a little confused as the Fed could come out and pay us to take money (not that far away if you factor in real interest rates) and it still would not do anything to curb the problems these banks put themselves in.
It is a token approach to a systemic problem …..no?
Ciao
MS
i am convinced that we will get a 50 pt cut.
so now what? wait till evening and start shorting?
or wait till tomorrow?
or just dont do anything its too unpredictable?
The posters on here who veritably seethe with anger at what’s happening at the Fed continually miss the point that Eclectic made so well.
The Fed’s action are solely and strictly designed to prevent a swift short-term credit market meltdown. It’s not about repealing the business cycle, it’s not about trying to prop up equities.
Banks need to have a good spread cushion as they take their write downs — and take them methodically.
You know, sometime I think some folks on here would really really REALLY like to see a depression. Take my word for it…you don’t.
Barry, you’re right to give ’em hell. We haven’t seen a serious down-turn, because we’re in a “bubble economy”, not a real business cycle economy. Paul Farrell talks about this over at Marketwatch, here:
http://www.marketwatch.com/news/story/america-land-bubbles-next-pop/story.aspx?guid=60CE4669-6814-4A48-A555-BE998EC6FC58&dist=SecMostCommented
KArl-
No anger here…….there seems to be alot of it in your post.
And actually I want to see the banks take some medicine. If that means that they are unable to extend credit( sort of already happening regardless of a fed cut ) then so be it. They put themselves in that position with the “too big to fail mentality” it’s high time they pay for the lack of any risk profiles.
If the lack of any real risk modeling doesn’t have some sort of consequence then it will be repeated and a far greater consequence will arise from it.
“it’s not about propping up equities”
It’s ALL about propping up equities. All you need to do is look at the timing of releases….either in response to a market sell-off (Tuesday) or coincidently one or two days before an options expiry-that has been done more than once in the last 6 months.
Credit markets didn’t sell off on Monday……equities did.. hence the cut.
Ciao
MS
ms – i agree. the fed has done a lot so far between rate cuts and targeting injections of liquidity to ease credit markets distress.
take control back from the market. they just cut 75 bps in reaction to global stocks plunging when no other central bank did anything and their markets took the worst of it as we were closed MLK!
Karl..
i am with you on this.
some people would rather see depression than inflation….or thats what they are trying to convey.
i am glad the FED is not listening to them….and its paying more attention to propping up the economy…
if that leads to equity bubble, what do i care….good for the speculators who are long…
if OIL prices can be kept below $100, we maybe able to inflate our way out of this mess to buy enough time to make some fixes for the long run….
right now we are a nation of debtors….its in our favor that dollar tanks….and inflation goes up(controlled fashion, please dont start talking about zimbabwe hyperinflation) leading to higher wages (outsourcing/offshoring may be the next thing which will be tackled by the politicians)
and i think if economy stays depressed we will see interest rate go all the way to .5%, and dollar may fall some more.
exports will get better and maybe there will be some pickup in local manufacturing.
I have to agree with MS here. Just as Iraq was ALL about oil, rates are ALL about equities. I suspect that the reason Social Security hasn’t been turned over to prop up the market is that the confiscations were spent from the get go. Still, a lot of pension money is riding on that bull…
Karl K, I would suggest that if we did/do get a recession/depression it will take less time to come out of it than it did back in the 30’s. That would be a great time for the FED to lower interest rates, and get out of the way. From what I have been reading – Schumpeter, Hayak, et. al., we are not going to avoid the big one, by lowering rates. In an economy that has banks that are burdened by crushing debt loads, and comsumers that are saturated in debt, all that lower rates are doing is delaying the taking of the much needed medicine.
Mr Saut had another interesting thought in the article you reference…
“I could make a pretty cogent argument that the population employment growth increases by roughly 1% a year and, therefore, if GDP growth falls below 1%, we are not employing all the available talent, and consequently, the country by default would be in a recession — but nobody agrees with my definition.”
why would anyone want us to enter a depression just because one thinks that the markets should work themselves out on their own?
Whats wrong with a recession? Honestly? Or, are things so screwd up from the last bubble that was inflated by ultra easy monetary policy, that our only hope is to repeat?
nevermind the TAF and the Repo process also targets the credit markets too.
Cutting rates at this point only improves the profit margin of the banks….
The level of financial acumen in this country is at a level where cutting rates is the ONLY thing that people truly understand. And they still have a hard time grasping that.
Let it fall now….get it over with……by stalling it you make it longer. Clean out the crap that the banks are clinging to and you allow the property market to return to a level of reality and, more importantly, buyers would return.
yes it would be painful and it would be counter to the industries mantra of “up is good” but we are kidding ourselves if we let these banks continue to lie and shift assets around that have little or no value-only the made up value for “shits and giggles sake-since that is about what they are worth at this point…….
If the system was allowed to cleanse……it actually might be ok by the end of this year-that does nothing about the bigger problem of excess inventory.. The longer they are allowed to defer ….the longer it is around.
Ciao
MS
techy-
just stop….you make a fool of yourself each time you comment.
I do not even know where to begin as your comment is so full of what if’s and maybe’s that I’ll stick to what I see as opposed to what I “want to see”
Funny stuff though. Especially the falling dollar rising wages part…….
Classic denial
Ciao
MS
400 point rally on the Dow today. Watch, regardless of all the doom and gloom. Correction, sure, eventually.
I stand by prediction yesterday… 25bsp coming at 2:15 today. If I am right, you guys might want to start shorting now, since 50bps is priced into the market.
Also, if this happens, maybe it will take some of the comments off the table regarding Bernake “placating the market.”
All I hope is that we don’t end up with a major recession and/or stagflation at this point. Thank you Mr. Banker, may I have another. ;-(
MS,
I agree what should happen is that markets are allowed to punish those who made bad decisions, and that doing otherwise not only prolongs the pain, but plants and fertilizes the seeds of the next debacle.
I also agree with Eclectic’s view that the end-game is deflationary.
It’s pretty clear now though that what will happen is a near-term overstimulation of an economy without much slack.
When we do get to the deflationary end-game, the fed will have zero credibility, and the US may even have lost the ability to borrow externally in domestic currency.
In the meantime, having not punished those overstaying in such momo fave’s as commodities, ag, and maybe even some too-big-to-fail financials this time around, expect them to be on fire in the coming stimulative phase.
at this point the market would rally regardless of what the fed does.
It is not a market…..it’s a perpetual motion machine that is set for “up”
why not 800 pts???
Seems just as idiotic…
Ciao
MS
Why wouldn’t the Dow rally 800 points if it went all the way down to 11,600 (briefly)? Most retailers are up 20% to 40% up since they hit bottom within the past 2 weeks and they’re still down over 50% from their 52 week high. Plenty of room to go up.
good luck with that……
IF I had a dollar for every time I heard:
“it has to go back up based on it’s loss so far”
Livermore would be rolling
Ciao
MS
And so we all tremble in fear at what the wizard is doing behind his curtain.
But manipulating the money supply does not, long-term, change anything real. It just changes the number of zeros behind the prices of real goods and services we buy and sell. For a time it makes us feel like we’re getting more–and up is better than down, no? But it is an illusion.
The fed actions turn more on psychology than data. It knows inflation is psychologically more palatable to the minions than deflation, even if in reality they are just two sides to the same coin (pun unintended, but hey, it sorta works).
The fed is counting on the Techy types to buy into the illusion that more money in the paycheck means things are going better, thereby forestalling the depressing reality that money doesn’t create real growth, and more importantly, forestalling the systemic cleansing of inefficiencies that a contraction would bring. (Incidentally, real wages in the US have hardly budged in over forty years).
The real question is do you want your recession medicine now, or later? If taken now, the dosage wouldn’t have to be as strong. If instead we create the temporary illusion of growing demand by printing money, then the recession medicine down the road is likely to be quite, er, depressing, and by then, the fed won’t have any more illusionist tricks up its sleeve.
Almost same view here :)
If the Fed will cut 0.25, or no cut the equites will go crazy, very crazy
Please give me my medicine NOW Bernanke.
Raise those rates, don’t lower ’em.
I’m thinking to 8% should do the trick.
MS..
and i refuse to engage with your, let go into depression…because we need to punish the speculators theory…
no matter how much you protest, the majority are debtors….and they will get their moolah from fed.
if the economy keeps going down…as you predict….the rates will keep going down…
and maybe the equity will also keep going up, because keeping money in banks is letting inflation eat it, so why not take some risk for some reward in equities.
you keep your good work of monitoring repos and PPT, i hope that data is helping with your investment strategy.
btw, if i was a big risk taker, i would go start taking short positions after this rate cut rally moves up 2-3%.
one thing to remember is that Bear Stearns wouldn’t be coughing up 10 year notes at almost double the treasurey rate if, as some have suggested, “it’s all good”
Twice the going rate…..
Food for thought
Ciao
MS
you know it all…..just gotta ask you.
too funny…..now you are a contra…
In 15 minutes you’ll be something else all together.
And my strategy is just fine thank you..best year start for many. And you???
Thought so.
Ciao
MS
Fed throws raw meat and the sharks go wild
10 yr yield spiking up…let’s watch that. Bond vigilanes maybe awoken
anyone lose TD Ameritrade access? This is the third time in the last couple weeks. They are losing my business as of tomorrow.
Hmmm, Fed dumping water on the core. Trying to prevent a China Syndrome?
What was that story about the crash landing at Heathrow, where the pilots kept pushing the throttle, but the engines didn’t respond?
Bernanke is not messing around this time! I was honestly expecting 75bps (fuel to Dow 13,800) now we have to settle with Dow 13,500!!
Suge , you’re the anti-MS
Oh boy, the markets going up on a whimper…this economy is going to boom. I mean go BOOM! BOOM!
VIX intraday gapdown…that’s HOT!
Dow may rally another 100…but this volume sucks as usual on a rise…Dow looks to be making massive head and shoulder. Dollar tanking.
Ciao,
Have a look for yourself:
http://finance.yahoo.com/bonds
The financial markets are about to undergo a total collapse. We will be in a barter economy within 2 to 3 years. Hundreds of trillions in bad debt. The game is over.
I guess there’s no way that they will be able to positively spin that number. lol
Looking at that GDP chart, looks like the worst GDP growth for an eight year period since the Great Depression.
See?? Justin wouldn’t MIND a depression.
Good God.
Shumacher wants banks to “take their medicine.” I see. So a $14 billion write off today by UBS is what…a glass of 1st growth Bordeaux??
As far a the equity markets are concerned, Ben Bernanke could give a rat’s rear end about what happens to the price of Amazon, Clear Channel, or Pfizer.
But what he DOES care about, and what is proper for him to care about, is the prospect of a credit market liquidity dry-up like Death Valley. And that’s would it be, ladies and gentlemen — Death Valley.
You know, I wonder how many of the truly bearish on here have ever taken a microeconomics course. Oh, that’s right, this is a blog about the MACRO perspective. Sorry.
So, a little micro lesson for you all. You see, it would be great if the currency were worth more, it really would. The problem is that if there’s isn’t any DEMAND to accompany it, it’s “worth” is purely academic.
So when the machine tool guy comes to the bank and says,
“Hey, could you lend me some money so I can buy a machine/hire people to make stuff to sell?”
the bank is going to say,
“Sorry, our spreads aren’t there any more, and besides, WE have to go out and get our own money. Come back to us in, oh, about 24 months. By then we’ll have our balance sheet in order. . .maybe.”
Rinse and repeat this scenario — about 10 million times.
THAT’s what a credit market meltdown is.
No investment. No unlocking of value through acquistions and sales. No constructing of value through the buying /building of assets. No nothin’.
But, hey, we’ve got a really GOOD currency. Yessiree, really good. Thank god I have room under my mattress for all of it!!
“Quarterly GDP reports are broken down into three announcements: advance, preliminary, and final. After the final revision, GDP is not revised again until the annual benchmark revisions each July. These revisions can be quite large and usually affect the past five years of data.”
I would add a comprehensive revision conducted every five years, due in 2008.
http://bea.gov/scb/pdf/2007/07%20July/0707_ta.pdf
One more citation from
Reliability of the NIPA Estimates of U.S. Economic Activity
By Dennis J. Fixler and Bruce T. Grimm
http://bea.gov/scb/pdf/2005/02February/0205_NIPAs.pdf
“For both current-dollar and real GDP, the mean absolute revisions from the advance estimates to the reliminary estimates decreased slightly. The mean absolute revisions from the preliminary estimates to the final estimates increased slightly (table 1). The
mean absolute revisions for both current-dollar GDP and real GDP are slightly more than 1.0 percentage point, and the revisions for real GDP are about 0.1 to
0.2 percentage point higher than those for the current dollar GDP.”
So, 1 p.p. is an avarage absolute revision.
>>is the prospect of a credit market liquidity dry-up like Death Valley. And that’s would it be, ladies and gentlemen — Death Valley.>>
it already IS there and that is the problem you have in not identifying it as already having happened. So of course you would want to drop rates to stave of something you can’t/won’t see…..
You know if you have your head in your ass as the Fed does it’s impossible to see anything much less the reason for the rate cut last week. Keep thinking the credit problem is “coming”….it was here last year but remember the masses were told it was all good and “contained” sounds like you bought it to. Too bad for you.
Ciao
MS