The consensus in the media is that revisions higher in GDP to 0.9% means that the US has successfully avoided a recession.
I highly doubt that is the case.
The good news is that, and once again, I can comfortably slip into a (rather than mainstream) contrarian recession call. I was uncomfortable when the masses were ever so briefly agreeing with me anyway.
Why do I disagree? As the chart below shows, the revised GDP gains were 1) National Defense spending by Uncle Sam; 2) Inventory builds; and 3) net exports. That leaves the majority of the economy — call it "private domestic demand" — in contraction mode, with an annual rate of -0.4% (vs. -0.7% in advance GDP). Domestic Consumption, Fixed Investment, Exports, and State & Local governments all showed quarter over quarter losses.
Its important to understand the significance of this factor. In the post WW2 era, this is a relatively rare occurrence. Merrill’s David Rosenberg points out that "Over the past five decades, such weakness in private domestic demand occurred barely more than 10% of the time." You can bet those times were not brisk expansions.
click for embarrassingly large charts
charts by Jake
Plenty of folks seem to think we have wished our way out of a
recession. They need to spend some more time with the actual data.
Is the inventory build a sign that companies are still producing into a slowing economy, are they a sign of execs not buying into the slowing economy meme, or are they simply fiction in order to eke out a positive number?
Barry, who needs data when we have headline writers?
I do have a serious question, though. Obviously economists, traders, and money managers are not stupid, and can interpret the data just as well as you and I. But if the economy is really crapping out (and I think it is, too), then how can the market go up day after day?
What am I missing?
“What am I missing?”
I wonder about this too. I have come to the conclusion there are two factors at work. One:recycled Chinese and petrodollars bidding up assets. Two: all economic statistics are adjusted for inflation but not stock market indices. We are losing 4% a year even if the market is flat and that is with the understated official inflation numbers. How many gallons of gas will one share of SPY buy this year compared to last year?
As you intimate, inventories being up (and being the most major component of the revision) shows that companies are holding supplies; my view is this is most likely because they can’t sell them. Correct? And exports are up because of the weak dollar, correct?
Why can the market go up while the economy sinks?
For one thing, 49% of the business the S&P500 does is in foreign lands. It’s not necessarily true that the stock market reflects the health of the U.S. economy.
Also, as the FED pumps up the money supply and, as a consequence, inflation, the prices on many things go up – that includes stock prices. In the beginning of the Weimar inflation in Germany, the German stock market inflated astronomically.
“I can comfortably slip into a (rather than mainstream) contrarian recession call. I was uncomfortable when the masses were ever so briefly agreeing with me anyway.”
Barry … the media masses that quickly switched sides, and acknowledged that a recession was on the table, also in the same breath, said the same recession was almost over.
The Perma-Bulls will never acknowledge anything other than “short and shallow” … that is, until the obvious is right in their mug.
BTW, I really do not enjoy being so negative on the economy … but my disdain for being clueless or stupid is much larger.
What do you mean “media consensus”? Technical accuracy of terms aside, consensus only has value and meaning when there is plurality of informed opinion.
isnt the stock market suppose to reflect only the earnings?
so if earnings are not falling why will the stock price fall?
if earnings are falling like in financials, it has resulted in stock price fall.
I do not beleive that the market is a future discounting mechanism…..maybe when it comes to being bullish but its too biased by the long side(~80% of money get invested in long only positions).
the market only goes down if there is real bad news….and real earnings drop.
as some one said, the market is bullish by majority, and it gives up only when hit right in the face by facts…till then up it will go and we should try to follow it to make some money.
I think most common sense answer to the inventory question:
Businesses generally have plenty of cash due to the free-wheeling economy and easy money of the last few years. With low yields on other investments and rapidly rising commodity and wholesale prices, better to bring-in the raw materials / components now at today’s prices, keep the lines running, etc.
Somehow I doubt we will “officially” be allowed to have a recession before November. If your dollars aren’t stretching as far or you’re laid off, well, that’s your own fault, I suppose…
if yo keep lines running by building invesntory you absorb more overhead helping to capitalize expenses–ie–keeps income up.
“…Why can the market go up while the economy sinks?”
Well, the sell off culminating in mid-March with the DJIA around 11,700 was a (intermediate?) bottom with the VIX rising to the mid-30s. The market just “had” to have a big bounce since it retested the bottom at that point. Did the market top-out two weeks ago after this run-up? Time will tell.
@ cm 12:06:28
Why not write opinion in the first place…?
Tick another indicator on the recession scorecard
Real personal income excluding transfers, which is one of the four indicators the NBER Business Cycle Dating Committee watches to confirm a recession, actually
fell by 0.2% MoM in April after a flat print (actually fractionally negative in unrounded terms). The 3-month trailing annualized trend is now -0.4% and shows
a peak in February of this year. Combined with four consecutive months of payrolls growth, a downturn in real business sales since October 2007 and a slump in industrial production since January, it reinforces our view that the US economy entered recession at the start of this year.
So, all big gains went into inventory? Does this mean layoffs will be coming soon if the inventory build does not reduce?
Also, has the amount that higher oil prices contributed to GDP been separated? I know that weird seasonal adjustments to the CPI tell us that oil prices have been going down lately (.2% last month, as I recall), but maybe this unusual attribute of the CPI hasn’t corrupted the GDP.
Suggestions & Hypos…
1) Inventories – are the result of past production decisions made on what sales are visible now. There’s a) a lag and b) CEO’s don’t look often at the BigPicture (cf GE’s miss on predictable trends).
2) Reported earnings may be up but nat’l account profits are down and trending lower, as is symptomatic of a slowing economy. The only bright spot is export earnings/profits (check out yesterday’s NOrthern Trust daily for some wonderful charts).
3) Dashboards and decisions – most of the marketspace players are overwhelmed with headlines, e.g. Consumption up. You need filters to sort out the noise from the data and dashboards (models) to turn the data into information. Most of the punditocracy needs to build their own ops centers and hasn’t dug beneath the headlines.
4) Dashboard Indicators – by my count there is NO economic indicator in the last two weeks that was helpful when you filter it…e.g. real consumption is slowly, real retail sales is negative, new homes were down -42% YoY…and so on for every single variable.
5) Nonetheless we are NOT yet in a recession defined as a significant slowdown in production, consumption and investment ala the NBER.
But isn’t that why we all read the posts and comments here ? To find out the real skinny ?
Also, remember that we are starting into the recession from a very weak position. This was the first “recovery” where GDP didn’t make it back to potential GDP, and where manufacturing continued to decline. From 1983 to 2001 we lost about a million net manufacturing jobs–less than could be accounted for by productivity gains. From 2001 to 2004, we lost 3 million, and have continued to slide since then.
“What am I missing?”
Just watch the shills at CNBC for a few hours and you’ll see. As Barry has found, they don’t welcome people with bearish sentiments
Their main sponsors are brokers. Brokers are like real estate agents. If the market’s going down, buy before it starts going up; if it’s going up, buy before it goes up some more.
I wonder if they have a conference every morning to come up with whatever the party line will be for that day.
Maria Bartiromo interviewed Einhorn a couple of days ago. He now knows what it’s like to be a malefactor invteviewd by Nancy Grace. Maria had obviously been primed by Lehman and cross examined him. She always works to get some bullish quote out of whomever she interviews.
I’ve noticed that even some of the people on Bloomberg have gotten the rah rah spirit.