A Realistic Look At GDP
The backward revision economic data train continues, this time in GDP, which came in at a "better" than expected 1% while the prior quarterly data was adjusted significantly downward from -5.5% to -6.4%. Additionally, per a brand new revision to the way GDP data is presented, the GDP decline demonstrated over the past year is now the largest since World War II. Current quarter jiggering aside, downward revisions to prior quarters have left the decline in real GDP at -3.9% in the year through Q2. And to demonstrate, the severity of this downturn, the Q2 data concluded the first three-quarter consecutive period of falling GDP since 1953-1954.
Economic indicators that many were looking to for an advance signal of the inflection point of the recession did not materialize. Most notably, consumer spending fell a more than expected 1.2%, after a 0.6% improvement in Q1, and even the Q1 blip was merely a function of one-time tax rebates that concluded in May. On an adjusted basis excluding the benefits of one-off consumer fiscal stimuli, the consumer deterioration is truly unprecedented. As Rosenberg puts it:
"Imagine, government transfers to the household sector exploded at a 33% annual rate, while tax payments imploded at a 33% annual rate and the best we can do is a -1.2% annualized decline in consumer spending in real terms and flat in nominal terms? What do we do for an encore? In the absence of the fiscal largesse, it is quite conceivable that consumer spending would have shrunk at a 10% annual rate last quarter!"
Business investments continued their downward trajectory after an unprecedented 39.2% plunge in non-residential investment in Q1, to be followed by another 8.9% drop in Q2. Undoubtedly this continued drop makes the talking heads giddy that after such a massive two-quarter collapse, the only logical way in Q3 is up. This remains yet to be seen.
Another major negative data point was inventories, which fell by a record $141 billion in Q2. Yet due to the major drop in Q1, this only accounted for a 0.8% decrease in GDP, which was less then expected. And keep in mind that this percentage drop was nearly completely offset by increased governmental defense spending! Nothing like Uncle Sam to keep plugging the holes as they appear.
Furthermore, per the imposed revisions, there were notable changes to the personal savings rate: the Q1 number was revised downward to 4.0% from 4.3% pre-revision, however the negative savings rate in 2005 was revised to a positive. The downward revision also affected productivity data: output per hour worked was weaker in 2008 than previously reported: whether or not this a cyclical side-effect of the biggest economic collapse in 70 years remains to be seen.
In summary employment, industry data, and profits were under severe pressure over the past year, and downward revisions to growth in the year behind us are not much of a surprise. The concern is that while governmental spending was critical and necessary over the past 2 quarters to keep the collapse from being unprecedented, this form of governmental intervention is merely a non-recurring event. Try as he might, Obama is helpless to singlehandedly prop up the 70% of the $14 trillion of US GDP which is accelerating its weakening support of the economy. The increase in total unemployment rolls will puts further pressure not just for continued government subsidies in all sectors of the economy (to the chagrin and detriment of key U.S. trading partners), but also for the need of Stimulus II. Without it, disinflation conversion into outright deflation is a practical certainty.
Some more observations on the flight to deflation from Rosie:
And, it is not just labour income that is still in deflation mode. Practically all forms of income are deflating from a year ago — interest income is down 4.5%, dividend income is down 23.0% and proprietary income is down 8.0%. The only income that is really going up is the income from Uncle Sam, which is up more than 10.0% and we have reached a point where a record of nearly one-fifth of personal income is being accounted for by paychecks out of Washington.
And as David concludes:
But it should be known that Uncle Sam himself does not create income — he borrows cash from current bondholders and future taxpayers. Not the stuff that seems deserving of a 760x multiple.
It is a sorry state where the only thing that is propping the world's greatest economy are promises of improvement and confidence games via the traditional media, with hopes of propping up a stock market which has long since ceased to be an indication of economic reality. The convergence between the S&P and the underlying fundamentals is, unfortunately for the administration, inevitable, especially since the government has now single-handedly taken over a key portion of major GDP output industries. Numerous empirical studies, especially from communist block countries, demonstrate just how "effective" the government is, when it decides to get directly involved in running a substantial portion of the economy.