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GDP: Nothing Is Ever As It Seems
This article originally appeared on The Daily Capitalist
The revised real GDP numbers for Q4 2010 were a disappointment for most economists who foresaw the third and fourth quarters to be much higher. The BEA's advance report last month said GDP was up 3.2%. The new numbers show it was only up 2.8%. As I anticipated in my article on the advance report, I expected the numbers to be revised downward and they were. These facts fit into my thesis that we are headed into stagflation.
First, the details. The consensus Q4 estimate of economists was that GDP would be +3.4%. From the BLS release:
The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, and nonresidential fixed investment that were partly offset by negative contributions from private inventory investment [see this on durable goods orders] and state and local government spending [this has to be a positive].
Imports decreased which are a subtraction in the calculation of GDP. The small fourth-quarter acceleration in real GDP primarily reflected a sharp downturn in imports, an acceleration in PCE, an upturn in residential fixed investment, and an acceleration in exports that were mostly offset by downturns in private inventory investment and in federal government spending, a deceleration in nonresidential fixed investment, and a downturn in state and local government spending.
Final sales of computers added 0.30 percentage point to the fourth-quarter change in real GDP after adding 0.29 percentage point to the third-quarter change. Motor vehicle output subtracted 0.31 percentage point from the fourth-quarter change in real GDP after adding 0.49 percentage point to the third-quarter change.
For the entire year of 2010:
Real GDP increased 2.8 percent in 2010 (that is, from the 2009 annual level to the 2010 annual level), in contrast to a decrease of 2.6 percent in 2009. The increase in real GDP in 2010 primarily reflected positive contributions from private inventory investment, exports, PCE, nonresidential fixed investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased [-12.4%]. The upturn in real GDP primarily reflected upturns in exports, in nonresidential fixed investment, in PCE, and in private inventory investment and a smaller decrease in residential fixed investment that were partly offset by an upturn in imports.
Prices as measured by the GDP Price Index continued their climb:
The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 2.1 percent in the fourth quarter, the same increase as in the advance estimate; this index increased 0.7 percent in the third quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.2 percent in the fourth quarter, compared with an increase of 0.4 percent in the third.
The price index for gross domestic purchases increased 1.3 percent in 2010, in contrast to a decrease of 0.2 percent in 2009. Current-dollar GDP increased 3.8 percent, or $538.8 billion, in 2010. In contrast, current-dollar GDP decreased 1.7 percent, or $250.1 billion, in 2009.
Just looking at spending measures, you can see the impact of the drop in imports. While real person consumption expenditures (domestic goods only) were up 4.1% in Q4 (versus 2.4% in Q3), real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- decreased 0.6% in Q4, in contrast to an increase of 4.2% in Q3.
If you need charts to see the stagflationary trend, here:
These charts show a flattening of output and a steady increase in prices. One might ask, with all of the monetary and fiscal stimulus efforts by the Fed and the Administration, why is output flattening out while prices are increasing? The quick answer is that their policies have failed, notwithstanding their protests to the contrary ("Yeah, but things would have been much worse ... blah, blah, blah.").
Is this a trend? I believe so. As I said in my article on the first release:
The bottom line is that we are seeing monetary inflation and it is impacting prices. Real savings is still in short supply and that is inhibiting growth. Spending will not revive the economy, but an inflated money supply will give the impression of economic improvement, but it will be an ephemera. It will further negatively impact real savings. I would expect weaker GDP numbers in Q1 2011 (wait until the revised Q4 come out to see if I'm right). Unemployment will remain high. This is a recipe for stagflation.
There is a new wrinkle in this forecast: oil.
As David Rosenberg said Thursday, rising oil prices reflect a "geopolitical risk premium" which is why bonds jumped this week:
- 10 Year Treasury
Rosenberg pointed out what is going through the minds of oil traders:
It is estimated that as much as 1 mbd of output has been taken out of the system from the Libya crisis and the outsized move in the oil price is testament to the view of just how tight the global supply-demand backdrop has been. Imagine where the price would be if it weren’t for the spare capacity out of Saudi Arabia. Analysts at Nomura are saying $220 a barrel is achievable if more production is halted in Libya and Algeria. ...
Saudi Arabia has the capacity to fill the void left by Libya, but that misses the point. The risk of further unrest is rising, especially with sectarian issues in full force in Bahrain. This means that oil prices at a minimum will retain a geopolitical risk premium — most oil experts now peg this at $10-$15 a barrel. If countries start to stockpile more crude in light of current events, one can expect the oil price premium to rise even further even if the situation calms down overseas. So no matter what, barring a sudden downturn in demand, and the one thing about oil (food too) is that demand is relatively inelastic over the near term, the risk is that we will see further increases in the price of crude even from current lofty levels.
Friday on Bloomberg TV, Rosenberg said he sees rising oil and food prices taking 1% off GDP. He said that 2 of the 3 times that oil and food went up together resulted in a recession. It didn't happen in 1996, he says, because of the forces of the tech boom.
It all depends, as they say. The issue is: how long will political roiling in the Middle East continue? ¿Quien sabe? My point is that we will see stagflation regardless of oil. As I pointed out in "A Note on Inflation: It's Here," the forces of inflation are already in motion and its effects are starting to show up, one of which is price inflation.
Again, we need to be mindful of what is "inflation:" it is always an increase in money supply. One of the effects of inflation is price increases. Other effects, even more serious, include the destruction of real capital (that is, capital saved from production or labor, not from printing fiat money). The destruction of real capital accompanying inflation is the only explanation for stagflation.
The result of an oil shock will add to our economic woes, compounding the recessionary side of stagflation.
There has been a lot of buzz about stagflation in the mainstream media lately. Most economists pooh-pooh the idea. The reason is that they don't understand inflation, mostly confusing price increases as a cause of something bad rather than aneffect of something bad.
Mr. Rosenberg is one of those who make this mistake. He points to low wages and low capacity utilization as the reason why we can't have stagflation. Unfortunately that wasn't the case in the late '70s and early '80s. (See this chart showing low cap/u and high inflation at the same time.) Other economists like this fellow have entirely no understanding of the issue:
"The old way of thinking used to be that you'd have a jump in crude-oil prices, leading to an increase in inflationary expectations, and that would push the long end of the yield curve higher," said Howard Simons, strategist at Bianco Research near Chicago. "Nice theory, but it hasn't worked over the last 10 or so years."
The thing I want to leave you with is Fed Vice-Chair Janet Yellen. Ms. Yellen gave a speech Thursday on improving the Fed's communications and thus our expectations of what the Fed will do. This is the Blah, Blah Theory of economics. The bottom line is that she and the Fed believe they can "jaw" their way to a better economy. By telling us that they are going to continue to be "accommodative" (i.e., "print" money) we will believe them and lend and buy and things will magically improve.
Don't believe a word she says. This is the arrogance of a central planner talking, believing that she and her co-workers control the economy. Pull a lever here and there, and voila! things are all better. The econometrician's dream.
I can tell you with some certainty that if things get worse, and if unemployment stays high, which is what I believe is happening, they will panic and pull out all the stops.
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His name was "Daddy Warbucks" and she was an orphan.
Superb article.
I think all economists know what is coming but what they say depends on their employer.
Several years of stagflation.
Several more years of tepid sub 3 percent gdp growth.
Most of you buggers nominally about the same income as you have now but poorer in real terms.
Income stratification remains the same.
I become a slumlord thru some auctioned small apartment complexes.
That is the optimist scenario. I am an optimist.
Sad that this is optimistic, but I am hoping it goes the futrue goes this
"well" too
wake up, smell the roses, ah they smell like shit.
The economy is in great shape----for all those making about $200,000. a year.
There is no inflation---for all those making about $200,000. a year.
For the rest, tough shit.
I wouldnt say great shape for the 200k plus crowd. If you are in that crowd you must be in some totally sheltered profession. For most of us we are working pretty hard for it and dont have any guarantees. Nothing particularly stable at any level if your income.depends on work.
i am watching the feds bullard on cnbc {i know}...this mutherfucker looks like he is on lithium and i think they are holding his family ...only way i can explain his words...there is going to be such a sheep slauaghter ...
If a crowd of ruffians breaks some shop windows in the fashionable part of downtown, the cost of the new glass counts in the GDP statisitic without taking into account the value of the glass that was broken. A far better stat would be national net worth, but I don't know where to find it.
The profit model conceptually assigns "profit" to the pillage of nature.
The only deduction from profit is the cost of paying for the wrecking crew. The destruction of forests, fisheries, fauna, and minerals is not deducted as a "cost". The pollution of the air, water, depletion of aquifers, and desertification is not presumed to reduce profit (except when government intervenes, and that is deemed 'bad for business').
Auditing for "net worth" runs counter to the for-profit model, and is therefore opposed by the PTB.
A far better stat would be national net worth, but I don't know where to find it.
answer = new captcha..my guess -0.
PCE excluding food and energy is a joke. Most readers here understand the FED is a political animal pushing a monetary created disaster. Government Sachs today actually said that closing the government down would decrease GDP. The BLS has no credibility... When you audit the FED this transparency would be clear. Excluding food and energy excludes the whole commodity complex at least with Food and energy...
The export of inflation caused food riots...
Santile is giving the FED and LIESMAN...on FOOD AND ENERGY
in russia: "the gov pretends to pay us and we pretend to work."
in USA:" the gov pretends the economy is fine and expanding..we pretend the gov is right."
or the one I like: the gov pretends bail out of banksters is the only road to prosperity..we pretend someone else will pay for it."
add your own to above.
in USA: "we pretend the Dems/Repubs give a fuck about voters and they pretend we the people have a brain"
They are all so arrogent that they stopped pretending a long time ago.
The Feds step to increase jawboning is simply because they're all out of policy options (fabricate money and buy debt). They've tried it 3 times and it hasn't worked because it won't work.
The problem is credit (debt) creation. How can you solve the problem of too much credit (debt) in an economy overdosed on it by creating more of the delusional stuff? Hence the Fed will gob off even more to those that want to listen to these spent failing impotent crones.
Regards your stagflation scenario, stagnant GDP growth and rising prices, that's precisely where we are at. It marks the end of 25 years of credit creation that largely faked a growing economy and wealth. It's where we are but not where we're heading, stagflation is a transition period to full blown deflation.
Take a look at the last remnants of inflation in the CPI, use the Govts own figures or the more accurate John Williams Shadow Govt Statistics figures. In 2009 they dropped like a stone the effect of the credit destruction that occurred in 2006 (property) through the Credit Crunch in 2007 on.
Inflation in the CPI did the usual dead-cat-bounce but nowhere near as high as previous (SGS figures show a 12% inflation rate now nearly halved at 7%). Draw a line on this 2 peaks and the trend is pointing down to deflation to come (for everything).
The credit creation game is over, it's a busted flush. The banks know it. The Fed is deluded. The economists as usual are 'extending the (previous) trend' of inflation forever and can't see what's about to bite them in their arses. A Big Deflationary Bear whose bite and the damage inflicted will tear half the economy to pieces between now and end of 2014...
...you have been Warned
Zero , your analysis is spot on as well as David Rosenberg's. Stagflation can't last because it requires debt creation which has to increase at rates higher than inflation---do economists understand this! I also agree that this is period of transition to full deflation.
"(fabricate money and buy debt). They've tried it 3 times and it hasn't worked because it won't work."
The myth of governmental incompetence is extremely dangerous. QE and the other policies enacted by the Fed the Federal Government that were intended to 'fix' the economy have most certainly worked. They have not accomplished the goals which the public was told were their purpose - but's that's because those weren't the real goals. Some real goals that come to mind are 1) to keep the system of fractional reserve banking and all the related schemes functioning (check!), 2) to keep the federal government funded (check!), and 3) to introduce convert austerity (and depopulation) through inflation (check!).
The Fed's doing its work just fine, it just doesn't work for us. ; )
You are missing a big and important point.
The gov debt monetized by the Fed is not really debt. It becomes part of the base that the Fed keeps in the other side of the balance sheet for money.
Why its not really debt? Because the Fed will always renew and buy more government bonds. Therefore the principal will never be repaid. And the interest on the debt are benefits of the Fed, that are then returned to the Treasury. So basically, in the monetized debt, the government will never return the principal and will not pay interest on it. ¿How is that real debt and not only an accounting trick to print money?
When the banks borrow from the Fed and then lend that money to the people, they are creating debt. When that debt contracts it creates deflation. This is absolutely true and you have it right.
But you are missing that when the government spends money obtained through monetized debt is equivalent to the government spending money that just printed. As long as the government keeps high deficits and the Fed keeps monetizing its debt, deflation can not ahppen. And they will keep doing it so deflation will not happen.
I agree. At some point, the banks will repair their balance sheet, clear off bad CRE, and start lending, and with rising prices just from $2.2 tr base, businesses will borrow to chase prices. We are not like Japan. At least, I hope not.
i absolutely agree with this. i also find it "very clever" of The Bernank. In effect "he's lying us into prosperity." It has been posited on SA that "there is no limit to this" as well. Theoretically this is true--but in practice "humanity says something different." The Bible has nothing on "the End of Days" compared to our so called "modern and advanced era." 80 million Egyptians? An "Exodus" on this scale would boggle the minds of the original "End of Days" types, let alone our "modern and advanced thinkers." And herein to me lies the problem of..."the lie." When it comes to "prosperity" and "money" it's always "show me" as they say. I think the technical term is a "credibility gap" at the level of the u know what. In other words "the American people need not know they were rich during WWII" because "they were making money." Obviously no one is comparing this economy to that one. Nor will anyone ever it would appear.
disabledvet,
I compare it all the time because, in the farming communities were able to generate a food surplus. Metropolitan areas were, of course, very dependant upon transport of agricurtally generated goods into the city. There were shortages of fuel and building materials in rural areas. Paint for my fathers lumber and construction business was almost unabailable. It might be considered a simple diet but we ate well. Such things as grapes from a little grape arbor on the south side of the house, a vegetable garden, a barn where we had milk cows during the war, an experiment with pigs for a couple of years and chickens. Maintaining those things required energy and wit but it worked.
Today, we can not onlly outproduce that era but have a great superhighway infrastructure to distribute more goods as well. Of course, we also have about 150 million more people. That means cost will go up but should be manageable if we can accept modest lifestyles that the Europeans have been living with since WWII.
What is wrong is that we have had lots of FRAUD and have developed an oligarchy that MUST be reigned in. The problem is that the oligarchy has gotten us into so much debt that the unwind will be painful. The Republicans don't want to tax the oligarchy assuming that their suppor basis will dry up. The Democrats don't want to disipline the populace assuming their support will go away.
Realistically, much of our populace have developed expectations that cannot be met on an ongoing basis. Adjustment will occur.
Zero gov, please explain to me how deflation can happen when the fed has the ability to keep pumping up debt and credit? While it makes sense that deflation can and will happen as debtors default or pay back debt and maybe even deflate the derivative monster to some degree with inflated currencies, I fail to understand how prices of commodities and even value producing equities will deflate while the currencies they are valued in are deliberately inflated.
Eddie,
Deflation in certain sectors can happen because the demand stays low. Building is reduced, used automobiles are "recycled" to a greater extent, the old TV is modified for digital with a converter box instead of buying a new TV.
Modifications to home or place of business are modified instead of building new. Local government expenditures for maintenance or services are reduced, ect.
The people that were formarly doing these things are unemployed. If if a person has dependants to support then he goes to work for less and puts the family on a budget. Bugeted living then becomes the way of life. The living standard, and expectations, have moved down.
++++
The FED knows it, it's inflate or die. And TheBernank will inflate until the dollar busts before he accepts deflation to set in. By that time his masters will again be in a position to swoop in and buy real assets for pennies to the dollar. What we are witnessing, with the complicit consent of our elected "representatives" is the greatest wealth transfer ever engineered since man started walking erect.
Agreed Zero. My question is how much more money are they going to print?
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