Goldman: "One Could Make The Case That GDP Growth Looks Weaker Than It Did A Week Ago"
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.