Reading Between The Lines Of Today's GDP Report

Tyler Durden's picture

With investors cheering the government's and Cash for Clunkers' massive contributions to preliminary Q3 GDP, numerous questions remain unanswered, chief among them being why is the dollar now so completely disconnected from any fundamental economic news, and how long can it remain a plaything in the constant shuffle to procure cheap risky assets even when it should get at least a moderate pop on an improving US economy. With the Fed expected to not raise rates for almost two years, the economy will not have an impact on the US currency for a long time, as such putting the country in a position where it may well face hyperinflation as the Fed continues to combat the current deflationary episode with every instrument imaginable.

Ironically, ongoing "good" data which are simply the result of various one-time, presumably non-recurring stimulus and subsidy programs will sooner or later translate into inflation, if pushed long and hard enough. And as broad based deflation is still the primary threat, courtesy of declining wages, even with gas again approaching $3.00/gallon, Obama may have boxed himself into a corner with his numerous TV appearance claiming that the economy has essentially mended.  Of course, even first year analysts at investment banks know to exclude one-time benefits/charges from ongoing operations. It is a pity the US president, however, never sat in on the Goldman Sachs analyst class: one imagines the firm owes him at least that much.

Either way, as stimulus and liquidity benefits taper off, with the Fed's inability to buy any more treasuries a key case in point, the economy has rebounded sufficiently high for even some of the most violent bears to throw in the towel. Yet Q4 GDP will see the impact of the stimulus programs falling away (and one hopes at least one regional Fed will support some of this inventory build data that the government is doing all it can to make the population believe is currently occurring). So even as Goldman engineered a perfect bear trap with their surprise revision lower, expect Q4 GDP to provide not only a likely lower adjustment to Q3 economic data, but to be a real miss to the 2.4% consensus reading (regardless of what Goldman does a few minutes before the number's official release). And with a range of GDP expectations from -1.5% from Mizuho to 5.5% for First Trust (good luck boys), it is pretty safe to say that nobody really knows what will happen, except that everyone has grown increasingly optimistic on Q4 GDP over time. What is simply ludicrous is that Q4 GDP now is expected to be higher than what it was expected to be in March of 2008 (2.2%). Gotta love government interventions.


And for those who care to think between the lines, UBS has released a client note which has observations on what, briefly, one can expect out of the US economy. Nothing earthshattering here, but useful to see that someone still is capable of some rational thought out there. Point 3 is particularly notable.

1. Good data could translate into inflation expectations

We acknowledge up front that the Fed does not have a very strong inflation mandate (compared to the ECB) and this is one reason market expectations for FOMC policy rates are relatively subdued at this stage. In addition, the first step for policy 'tightening' will be balance sheet reduction and cessation of liquidity programs, rather than outright rate hikes. However, this does not mean that interest rate expectations can be ignored indefinitely as growth figures pick up. The chart below shows the relationship between inflation expectations, as measured by the 5y5y forward breakeven, and arguably the two most important data points in the US economic calendar: Non-farm payrolls and manufacturing ISM. Both releases have been gaining since Q4 this year and inflation expectations  appear to be tracking the trends through Q2 this year before stabilising. At present, the jump in inflation expectations is likely due to a combination of Fed debasement fears or actual a return in trend growth, but the former will become the dominant driver if trend growth does pick up materially, as markets view current Fed policy as incompatible with economic performance. The end result would likely be a shift in the Fed's bias to contain inflation expectations.

2. Good data may steepen the yield curve

The steepening in the US yield curve has attracted a lot of attention in recent days, even though the specific drivers of the move remain unclear. Over the past decade, better growth, especially during a recovery phase of an economic cycle has translated into a steeper yield curve, but this certainly does not spell good news for equity markets either, as the chart below clearly shows an inverse correlation between the two. This relationship appears to have broken down during the phase of the crisis but it is premature to suggest the status quo can be maintained indefinitely. The rebound in the S&P has largely been liquidity driven rather than growth-driven, and once markets will need to revert back to fundamentals, a steep yield curve would hinder advance in equities, especially as it implies steeper
borrowing costs across the board. Add on the fact that the US Treasury is expected to drastically  increase the amount of supply due to stimulus efforts, and anecdotal evidence pointing to reserve manager purchases reverting towards maturities, steepening pressure will unlikely subside anytime soon.

3. Remember, policy is about liquidity, not rates

When the FOMC sets policy, fundamental economic developments will still determine where policy is headed, but at this stage, policy is balance sheet policy rather than the Fed's target rate. As the chart below shows, trends in the Fed's balance sheet are playing a role in where markets are headed to globally, and going back one step, the US' growth patterns up ahead will determine in which direction the Fed's liquidity policy will evolve. At this stage the risks are balanced. The size of the Treasury purchase programme does not look like being revisited anytime soon, and the Fed's MBS purchases will be somewhat offset by existing programmes expiring, though nominally the balance sheet is still expected to expand. If data over the next few months improves to the extent that the Fed will confirm its balance sheet growth will cease, current correlations suggest markets will also stop rallying, despite data coming through as positive. One could even argue that risk markets' gains have already fully priced in economic growth under Fed stimulus. As such, Q3 and Q4 growth figures will have a significant bearing on where policy globally is heading next year, especially as most central banks will not move ahead of the Fed. If the recovery is sufficient enough for liquidity growth to stop, risk appetite may well correct rather than improve.

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Divided States of America's picture

It dont matter, they can report 4% GDP next Q when its just probably 1.5% in reality as Wall Street will be cheering and Main Street is dont matter because Main Streeters aint in this game. They cant afford to. Wall street and Main street dont jive and will never mesh until we become one, when Main Street is fed up with the way our hard working money is being used to support the lifestyles of Wall Street. Its time we stand up for ourselves.

Anonymous's picture

Good comment "main streeters aint in this game" that sums up what Ive been thinking while hoping all collapses for the Wall St a-holes

gridlocked's picture

Government workers and contractors are feeding at the trough though and loving it.

Main Street taxpayers have been ignored throughout.

Anonymous's picture

"Main Street" doesn't pay much in taxes either. The top 1% pays more than the bottom 97% combined. The top 1% ain't main street and main street is not filling the trough.

Noah Vail's picture

So, if I take all that, put into my blender, push the button and then pour it into a Margarita glass, what shall we call it?

Ivanovich's picture

"Ass in a Glass" has a good ring to it, wouldn't you say?

KawKaw's picture

It's called Operation Enduring Bubble!

Anonymous's picture

if anyone thinks that interest rates are set by fomc or fed funds discount rate he needs to put the kool aid down....interest rates are arbitrary and managed through interest rates swaps which is why the tbtf banks will NEVER under any circumstance fail....those banks are proxies for the fed's interest rate policy through their massive derivatives book....

gdp? gdp shmeedeepee....take out stimulus, take out inventory and you have a flat quarter....sorry folks, and especially larry krudblow, there is no recovery....any downward revision in gdp would put it within sampling error and thus make the quarter's numbers entirely meaningless....

walküre's picture

Unemployment continues to rise.

Foreclosures continue to increase.

Benefits are about to end.

Incomes are declining.

Stores and malls are closing,


Where is the upside?

I don't get it. Growth based on what? 3.5% more of what and in what time frame?


Anonymous's picture

They count stimulus spending (going into debt) as 'growth'. Also, lots of companies laid off hordes of employees in the run up to summer as they look ahead to a slim autumn/winter, so they appear to 'add to the growth': Their increased profits--most likely to be saved to serve as an airbag when they hit the Christmas tree--provide a convenient mirage of growth when you don't look deep in the numbers. Look at personal income: Down. Look at disposable income: Way down.
Look at the government debt/spending: Way, way up. Put this sort of 'data' together with BLS 'data' and you have a nice comfy way of obfuscating job losses while trumpeting imaginary growth.

Anonymous's picture

Umm, someone's nose?

Not so complicated. Just take a look at the four main components of the GDP.GDP = C + I + G + (X ? M).
Is it consumer spending? N-o-o-o.
Investment in capital? Don't thiiiiink soooo.
[skipping for effect] Exports minus imports? Not enough to move the whole GDP 3.5% up.
Government spending? We have a winner!

So the government is celebrating how much money it borrowed and then spent on one-time bad ideas.

Anonymous's picture

Government Growth ONLY ....

Change you can believe in !

ElvisDog's picture

No, no benefits will never end. In the brave new world of Obama and the Democrats unemployment benefits will never end but there won't be any jobs.

EagleProjets's picture
USA economy: Out of jail but not home free October 29th 2009  



US third-quarter GDP data are uplifting--the economy has now emerged from its deep recession. Consumers are spending again and fixed investment-which has taken a pounding this year-started to rise. Export performance was perky but the boost to headline GDP was dampened by a greater rise in imports. Although the latest results are encouraging, they may not be sustained unless the government introduces further stimulus measures. Because the government cannot go on spending indefinitely, the economy is forecast to grow faster in 2010 than it will in 2011.

Advance data from the Bureau of Economic Analysis released on October 29th show that the economy grew by 0.9% quarter on quarter in the July-September period, after shrinking in each of the four quarters preceding that. It also notched up an annualised growth rate of 3.5%, after four consecutive quarters of decline.

Turning around

US consumers appear to be starting to loosen their purse strings, demonstrating the might of the government's US$787bn fiscal stimulus and the shot in the arm to motor vehicle sales provided by the cash-for-clunkers scheme (which ran for a month until its US$3bn budget allocation was exhausted in the final week of August). The 3.4% annualised increase in personal consumption expenditure seen in the third quarter--which added a hefty 2.4 percentage points to growth--was stronger than had been anticipated. Nevertheless, this is unlikely to prove sustainable without further fiscal or monetary stimulus. Certainly, households’ financial condition remains fragile. Wages and salaries remain stagnant and credit is still hard to come by. The rate of unemployment reached a 26-year high of 9.7% in August, and home foreclosures remained at a near-record level.

The performance in terms of investment also improved, as fixed investment rose by 2.3% in the third quarter. However, this is hardly impressive given the sharp falls seen over preceding quarters. Fixed investment could hardly have fallen much further given the rate of decline seen in the eight preceding quarters--investment had plummeted by 20.2% in the fourth quarter of 2008, followed by a startling 39% drop in the first quarter of 2009 and a further 12.5% in the second.

Chinese demand may have helped exports of goods and services post a healthy 14.7% expansion in the third quarter (they contracted in each of the four preceding quarters). With world trade forecast to grow by 3.7% in 2010 and 4.6% in 2011 (after contracting by an estimated 9.4% in 2009), prospects for the export sector are certainly improving (albeit gradually). Nevertheless, the gains from the external sector were dampened as the US sucked in more imports in the third quarter--they rose by 16.4%, the first increase since the third quarter of 2007.

More help to come?

Congress is mulling over whether to dip into its pocket to offer a new round of stimulus measures. Plans currently under discussion include extending and expanding an US$8,000 tax credit for first-time homebuyers, an extension of unemployment insurance benefits, and help for small businesses. The Obama administration unveiled a two-part programme on October 19th to help home buyers and tenants. The scheme supports state and local housing agencies through bond purchases and liquidity support. And under the extended unemployment insurance benefits now being considered by the Senate, coverage would be available for several more months, with special provisions in states where the unemployment rate is higher than 8.5%.

The Economist Intelligence Unit still expects that the economy will contract by 2.4% this year, reflecting the depths of decline in previous quarters. We believe that the economy will grow by around 2.5% in 2010 thanks to the highly stimulative macroeconomic policy and an end of destocking. However, growth will decelerate to 1.3% in 2011 as the effects of the fiscal stimulus fade and against a background of continued private-sector balance-sheet rebuilding and the Fed's switch to monetary policy tightening. The risk of a W-shaped recovery, with a renewed flirting with recession, is high.


The Economist Intelligence Unit Source: ViewsWire
Anonymous's picture

Stop posting columns, asshat. This is a comment board. Anyone with a browser can find all the fucking columns he wants without dipshits like you reposting them. You remind me of a dog who has to piss everywhere.

EagleProjets's picture

Hey you what his your problem anonymous jeck. The difference between me and you. I'm posting something good and you are posting stupidity comment like yours. Just for your information. Viewswire his a paying site from The Economist.

Anonymous's picture

john williams reports 92% of gdp growth was from non-recurring factors....

so since the cnbc pom pom girls love using operating earnings which exclude non-recurring results as the golden standard, i wonder if they will apply the same standard to gdp....i think i know the answer don't we larry....

digalert's picture

Channel surfing I saw a banner on CNBS'

"stimulus to remember"

Oh I think we'll all remember...

Cognitive Dissonance's picture

"stimulus to remember"

That's what my ex said the first time I used Viagra. Never could manage a repeat performance. Thus the ex. :>)

Cognitive Dissonance's picture

When this/any stimulus finally stops working, imagine the smoking heap of a dog shit economy that will be left.

We have become numb to the insanity of it all.

morphizm's picture

Wait, what did I miss? The growth of the economy is based on who buys cars and homes? Are you fucking kidding me? Both are dead-end markets. They're over.

Anonymous's picture

Out here in the middle, absolutely nobody believes anything that media or the government tells us. We aren't getting vaccinated against swine flu and we sure as hell don't believe their economic numbers. We just need to look around town to see what's really going on. Wall Street and Washington may be fooling themselves, but they aren't fooling anyone else.

Froggy's picture

even as Goldman engineered a perfect bear trap with their surprise revision lower...

Indeed.  I generally find it hard to swallow vast conspiracy theories, but I find no other plausible explanation for this.  There is no doubt that GS' downward "revision" caused a pants shitting in financials ahead of what ended up being a hot number today.  Assuming they scooped up alot of those turds, they now have the chance to fling them.

mannfm11's picture

Yeah, I bet this gets revised downward.  For one, where did all the retail sales come from?  Was Q2 that bad?  Are we talking about an increase or a reduction of a reduction?  The car is stuck in second gear so floorboard it and get on the autobaun. 

gookempucky's picture

GDP Garbage Department Pimps-----

Small business assets shrinking at 1.4 million$ clip per minute

Corporate assets falling at 500k a minute-----where is the GDP????

Household assets increasing---now stands at 55 trill 800 bill---man people have a lot of junk or its from MAGICAL market wealth creation

Savings rate is at $2,600 per person---I knew we could do it.

Anonymous's picture

This is what happens when you allow a whole bunch of Keynesian economists to decide our country's financial future. Keynesian economics=crackpot economics. Any stimulation or taking on of debt is condiered growth! What an f-ing joke!