Last week's economic data was hailed by all the optimists as definitive evidence the a double dip would be easily avoided. Long forgotten hopes about actual growth (it has been about 10 months since someone uttered CNBC's 2009 trademark phrase "green shoots"), the Kool Aid set has now started extolling the virtues of not falling into an outright depressionary freefall. As such, very soon the lack of images of lines in front of soup kitchens will be enough to push the Dow up by 1,000 points intraday. Additionally, the lack of a nuclear holocaust is worth at least 10% on the S&P (and has been priced in about 90% so far). And as usual, the government propaganda machine presented the data in a way in which the robotic headline scanners would immediately go nuts in another daily pumpatahon. We already presented Rosenberg's take from last week showing why the data was certainly not to be trusted in the first place. And just to reaffirm the case that not all is well, here is Goldman's Ed McKelvey demonstrating the ridiculousness of presenting last week's data as a rout for the bulls, when all it really did was beat already rock-bottom expectations, and in addition set the seeds for an even weaker Q3 GDP print.
On the whole, it?s been a good week for US economic data. As shown in Exhibit 1, the five-day average of our US-MAP composite score has moved further into positive territory than before as reports on factory activity, pending home sales, and the labor market have surprised to the high side. In fact, some of these readings have benefited from positive judgmental adjustments, as factors not readily apparent in the headline indicator have also been better than expected. However, this does not mean that the outlook for US economic activity has improved, except insofar as the better-than-expected news eases market worries about a ?double dip.? At least some?perhaps most?of the improvement in US-MAP reflects what Paul Krugman once called, in a much different context, ?The Age of Diminished Expectations.? In the current setting, we note that several prominent forecasters have marked down forecasts of economic activity and therefore may also have lowered their sights on the higher frequency indicators. Moreover, there are at least a couple of troubling pieces of news buried in this week?s heavy bout of data releases.
So where were the key data weakness in the past week according to Goldman? The first place- the collapsing gap between the New Orders and Inventories diffusion components, and the corresponding surging gap with the ISM Mfg index. As McKelvey says, this is an "important lead indicator of movements in the composite index and in industrial production."
The party in US equities started on Wednesday with the release by the Institute for Supply Management (ISM) of its monthly survey of conditions in the US manufacturing sector. Without question, the report was better than expected: the index rose 0.8 points instead of falling 2.7 points, as the median forecaster had expected. In fact, only one of the 78 forecasters surveyed by Bloomberg expected any increase from July?s 55.5 reading. In this case, the details of the report actually reinforce the case for further slowing in this sector. As shown in Exhibit 2, the gap between the indexes for new orders and inventories, an important lead indicator of movements in the composite index and in industrial production, almost disappeared in the August report. As recently as May, this gap was a robust 20.1 index points. The clear?if uneven?downward trend in this indicator actually strengthens the case for a decline in the composite index in coming months. The bottom line: US manufacturing output may still be expanding, but the risk that these goods are winding up on the shelf has increased.
Ah, good ole' inventory accumulation. Nothing like using Chinese tricks to misrepresent GDP in the USSA.
Next up: debunking the "surprising" beat of the pending home sales.
Thursday?s report on pending home sales provides an even better example of clearing a low bar. Despite two months of sharp declines following the deadline for sales contracts to be written to qualify for the homebuyer tax credit, the median forecast for this index was for a decline of 1%. (As a reminder, this relatively new indicator is an index of the number of homes under contracts that have not yet been closed; it would therefore be especially sensitive to the contract deadline for the tax credit.) In the event, the 5.2% bounce reported for July topped all 37 forecasts in the Bloomberg survey. However, as shown in Exhibit 3, the index hardly paints a positive outlook for sales of existing homes. Instead, it confirms that the tax credit pushed sales up temporarily from a base that remains quite low.
Then again, we are confident Yahoo Finance and CNBC had a slightly different look at the data.
Second to last, is last week's terrific NFP data. Or not.
Moving on to this morning?s report on employment conditions in August, we and the markets were again treated to a surprise relative to subdued expectations, as private-sector payrolls rose 67,000 in August from a level that was revised up 66,000. We had expected no change, and the median forecast was for a 40,000 increase. Wages also rose by more than anyone anticipated, and while the jobless rate ticked up (as expected), this increase came alongside a substantial gain in employment as measured by the survey of households from which the jobless data are drawn. However, despite this better-than-expected news, it is clear that US businesses remain in a cautious mood when it comes to staffing. As shown in Exhibit 4, private-sector payrolls are still following the ?jobless? track of the last two business cycles rather than the much more robust template of earlier recoveries.
And oddlly enough, the most important data piece from an accounting standpoint for the Q3 GDP, was the little noticed Construction Spending. As Goldman points out, this report, which came in below expectations, and whose prior revisions were "dismal" can wreak serious havoc on the already weak Q3 GDP numbers, which most are already anticipating to be around 1-1.5%.
Not all of the news was good this week. Although real consumer spending was slightly firmer in July than expected, unit sales of lightweight motor vehicles changed little in August. Today?s ISM report on conditions outside manufacturing also revealed more weakening than expected, and construction outlays dropped 1% in July from a level that was revised down a whopping 2.7%, as shown in Exhibit 5. This dismal construction report flew below the market?s radar, as it normally does since it usually comes out alongside the ISM manufacturing survey. One might dub construction outlays the Rodney Dangerfield (?I don?t get no respect?) of US economic indicators. Of all the data released this week, it has the most direct bearing on the real GDP ?bean count? next to the monthly consumption report. Hence, since consumption was only modestly better than expected, a case can be made that third-quarter growth might actually be lower now than we thought a week ago despite all the upside surprises. For now, we are content to leave it at 1½%, as potential errors are not too imbalanced.
So when all is said and done, was the 5% jump in stocks, and the entire July retrace, justified? Of course, not. But when people's, and more importantly robots' attention spans, jump from number to number like a lemming on speed, that is precisely the expected result... At least until such time as Obama's resumption of daily Rooseveltian New Deal tactics confirms so very glaringly that the depression never left.
Not quite on track, and not sure if anyone's already linked to it, but RT's Marina Portnaya talks to Larry Kotlikoff about 'US bankruptcy, fiscal 'child abuse' and six-decade Ponzi scheme'.
http://www.youtube.com/watch?v=vGuY8TB_Ljw
DavidC
Bankruptcy, bitchez!
Shame shame. DavidC should know better.
:-)
I do, just easy to resist the temptation!
DavidC
And conversely, it is possible — indeed, necessary — for the nation as a whole to spend its way out of debt: a temporary surge of deficit spending, on a sufficient scale, can cure problems brought on by past excesses. -Paul Krugman (NYT OpEd 9/6/2010)
http://www.nytimes.com/2010/09/06/opinion/06krugman.html?_r=1
I would LMAO if this guy didn't have such a following. Pitiful.
Krugman has a following? A sober following? Because you have to be stoned ass drunk or just plain stoned to believe the drivel he's been shoveling for the past 4 years.
I can tell you as a fact every stoner I know has far more lucidity and clarity on the situation that that guy.
please do not lump stoners in with lithium or largactyl usage, they are an entirely different animal.
Krugman is a construct that the oligarchy has bought and paid for. From the manufactured Nobel to the endless columns trumpeting the party line, he is definitely their bitch. Prolly makes a good living as a result, though...
" it is possible — indeed, necessary — for the nation as a whole to spend its way out of debt" - simply amazing that something like this could be printed in an semi-esteemed newspaper. Seriously, how do you spend your way out of debt?
Back to the GS comments - odd how the uber-bulls at GS have become somewhat of the voice of reason? Of course, I realize there are more then a few commentators there, with some still taking the V-shaped side.
I at least could sympathize with the "green shoots" arguments - even though they were mostly 2nd derivative comments. It was the V-shapers. Now all they can do is claim the double dip is off the table. But, how do you pay off our debts and make our debt service?
And Krugman uses the piece to sermonize about economists forgetting the lessons of 1937-8. A good historian can tell you the situation is not the least bit comparable to the 2010s. The key difference: US dollars and debt had not yet flooded the globe and the galaxy beyond, and most developed nations became big net debtors to the US within a few short years. Not the case today.
Perhaps he should also review the lessons of the 1960s and 70s where "spending our way out of debt" became the national pass time. That was the early warning.
Every addict of every stripe hears the true denial in Paul.
The way out is found in the purchase of another bottle.
And those who wish to find solace in his words shall.
And conversely, it is possible — indeed, necessary — for the nation as a whole to spend its way out of debt: a temporary surge of deficit spending, on a sufficient scale, can cure problems brought on by past excesses. -Paul Krugman (NYT OpEd 9/6/2010)
Wow, Krugman said that TODAY? What a fucking dolt...that's sort of like saying that the cure for a punch in the face is to amputate your own nose. I don't know what he's smoking, but I'd sure like a bag of it. Cheech and Chong would be drooling with envy.
Mr Krugman meet Mr. Cheney. Deficits don't matter....right?
Don't worry the govt. is about to throw several billion at the problem and see what happens...
It will peak...then collapse again. We are still have yet to find sustainable levels.
The likelihood of any of it sticking to your walls or mine is infinitesimal.
What walls, the ones' been foreclosed and repossessed?
Outhouse walls?
So, Goldman wants new shorts to squeeze?
Krugman has lost any respect he may once have had from even his own deluded profession. He has become the chief pimp of the New Orthodoxy. It is beyond pathetic that such drivel is propagated; and extremely dangerous.
TPTB have bought him hook, line and sinker.
Anecdotally I can say that I've left a lot of stuff sitting on shelves:
You may want to add that the banks are in BAD shape and nobody is talking about that.
Here is a link to a site that has the defaults on the books and the trend does not look good.
http://www.thehardmoneypros.com/Top25_Largest_Banks_Defaulted_Loans.shtm
Just think of it. Krugman as Torquemada.
We are ever so truly fucked.
When do we get to vote again? Will it work better this time?
"When do we get to vote again? Will it work better this time?"
When all other branches of the government are subservient to the fourth, no...no it will not.
IF that is true there is only on solution...
Armed Rebellion.
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DOW/S&P500/FTSE/EURO short signal continues:
http://stockmarket618.wordpress.com