Rosenberg Agrees With Goldman: Sees Inventory Surge As Precursor To Negative Q4 GDP Print, "Double Dip Delayed, Not Derailed"

Tyler Durden's picture

Eerlier we pointed out that Goldman anticipated that a surge in the inventory number (which it did, coming at $115.5 billion compared to Goldman expectations of sub-$100 billion ), would simply lead to even more Cash 4 Clunker like forward performance "pull", resulting in a collapse in the quarter in which inventory clearances finally took place. It seems the quarter in question is the current one. Indeed, various channel checks have confirmed that inventory levels at assorted businesses have been trimmed aggressively into the year end, and it is not unfeasible that we could see a $30-40 billion drop in inventory levels in Q4. Problem with that is, it will result in a negative GDP print due to the high marginal impact of a swing as seemingly small as the anticipated. Here is Rosie's explanation for why the government can play timing tricks all it wants but at the end of the day, it is inevitable that the economy is now contracting. How long before it is officially disclosed is at this point far more of a political issue than an economic one.


U.S. real GDP expanded at an as-expected 2% annual rate in the third quarter in what is turning out to be a classic case of a muddle-through economy. Inching ahead but not at a fast enough pace to have any meaningful impact with regard to addressing the unprecedented amount of excess slack in the labour market.

To be sure, 2.0% is fractionally better than the 1.7% pace posted in the second quarter when double-dip risks began to surface. And, while a plus sign front of any GDP print may be viewed as constructive in some circles, this is an anaemic pace for this stage of the cycle because it is completely abnormal to be seeing the economy slow down heading into the second year of a recovery phase. On average, at this juncture, real GDP growth is accelerating, not decelerating, and typically advancing at a 5% clip, not 2%.

The major problem in the third quarter report was the split between inventories and real final sales. Nonfarm business inventories soared to a $115.5 billion at an annual rate from the already strong $68.8 billion build in the second quarter — this alone contributed 70% to the headline growth rate last quarter. If we do get a slowdown in inventory investment in Q4, as we anticipate, it would really not take much to get GDP into negative terrain. We estimate that if the change in inventories slowed to about $94.0 billion in Q4 (about $22 billion below Q3 levels), GDP would contract fractionally. In other words, it won’t take much for GDP to slip into negative terrain.

It would have been much more encouraging to see real final sales — the rest of the economy — do better than the tepid 0.6% annual rate gain that was posted. And that 0.6% annualized growth rate in real final sales follows a string of exceptionally weak performances — 0.9% in Q2, 1.1% in Q1, 2.1% in Q4 of last year, 0.4% in Q3 2009 and 0.2% in Q2. Historians will note that this goes down as the weakest recovery in real final sales on record, despite the fact the economy has been on the receiving end of the most pronounced dose of fiscal, monetary and bailout stimulus ever. Quite an accomplishment.

The recession may have technically ended, but outside of inventories, and the best days of the re-stocking process look to be behind us, this has been a listless recovery. At 60 basis points above zero, real final sales are just a shock away from double-dipping — a shock like looming tax hikes, accelerating fiscal cutbacks at the state/local government level or the millions of “99ers” about to fall off the extended jobless benefit rolls at the end of November.

In terms of components, the good news was that consumer spending did accelerate to a 2.6% annual rate from 2.2% in the second quarter — the best performance since Q4 2006. Non-residential construction eked out a 3.8% annualized gain, the first advance since Q2 2008. But the good news pretty well stopped there.

Capital spending came in at a decent 12% annual rate, but the momentum is clearly receding after the 20%-plus growth rates of the prior two quarters. And, as we saw with the core capex orders for September, business spending intentions are coming off the boil. Residential construction collapsed at a 29.1% annual rate in response to the expiry of the tax credits, the steepest decline since Q1 2009, and there appears to be little recovery in sight, though it stands to reason that we won’t see another decline of this magnitude again, at least not over the near-term. At some point inertia sets in, even on the moribund residential real estate sector.

It is also no surprise to see imports bulge when inventories did the same, but what caught our eye in the external trade portion of the GDP report was the sharp slowing in export growth, to a 5% annual rate trend — half the pace we saw in the first half of the year. Weren’t the overseas economies supposed to be providing a big lift to the U.S. economy?

Finally, state and local government spending dipped 0.2% — the fourth decline in the past five quarters. At a 12% share of the economy, this sector is nearly twice as large as business spending, and can be expected to be a dead-weight drag on the economy as far as the eye can see.

Here is the bottom line: the double-dip has been delayed but not derailed; despite widespread cries from the economic elite to the opposite. The economic recovery is extremely fragile and unless we get an improvement in real final sales, all it would take would be a modest inventory drawdown to pull real GDP back into contraction mode.

Source: Gluskin-Sheff

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SheepDog-One's picture

Nah, 'recovery' never 'derailed' no matter even a negative GDP cant derail the recovery because the recovery is imaginary to begin with.

frankTHE COIN's picture


Fed fondles the public with its invisible hand (stole this fromSheepDog-One)

chet's picture

Anyone else catch that move in gold and silver?

Larry Darrell's picture

Yes, looked like a mini flash dash in silver.

Someone noticed on a thread a while back that the gold and silver move ups were always over by Tuesday in the past few months and then mostly flat the rest of the week. But silver up $1 between yesterday and today may mean the end of this previous trend.

OutLookingIn's picture


 Yah! Up 48 cents and $14.70

NOTW777's picture

look at the nice candle on SLW - new hi s :)

pat53's picture

Why would anyone listen to this guy?  LOL Rosenberg has been calling for stocks and the economy to implode for months... it hasn't happened. How can this idiot have any clients left? he has ZERO credibility ! His clients (assuming he still has any) have missed out on one of the biggest equity rallys in history. Hopefully his clients were just in cash, and God forbid, not short the market. Total buffoon !! LOL

SheepDog-One's picture

Nah it never happens until it does implode...then those 'crazy guys' who called it for months prior get a couple of interviews, then everyone goes back to calling them all crazy as the FED re-pumps the markets and everyone is again convinced its all good.

FEDbuster's picture

You are right.  Rosenberg's commentary kind of reminds me of Peter Schiff's warnings about the housing bubble in 2006.   Forget these doomers, I just listen to Jim Cramer, Steve Liesman  and CNBC.

"I will try again to blow a bubble that will last all day......"



Slim's picture

1) He has no "clients" - he's an economist providing market strategy at GS+A and Merrill before.  He paints the macro picture, nothing more.

2) Realize that he's right on about the fundamentals and it is only through massive, coordinated and unprecedented efforts of central banks trying their best to cushion those fundamentals that we haven't proceeded directly down that path.

3) No one ever goes all-in on any one view and would subject themselves to a binary outcome.  Why?  Because if you lose, get it wrong, or are early even once, you are wiped out.  Going all-in is the very best way to completely destroy yourself - hence diversification and reasonable sizing of directional positions.

4) Specific portfolio advice that Rosy has liked over the last year has been gold and the long Treasury bond (both of which have done well and provided some serious diversification on several different scenarios) and while he didn't like equities he did like commodities before that so good enough. 

5) A word of advice - if you have nothing nice to say, don't say it at all.  If you insist on saying it, you should at least have a first hand understanding of what you are talking and an accruate portrayal of the facts rather than spitting back something you heard someone else say.

hambone's picture


I'm a guy that does the math.  I used to buy rental properties in the 90's and early 2000's and I'd do the math for buy and hold (any appreciation was a bonus) and they penciled nicely.  But then a funny thing happened starting around 2003 onwards...the rentals were not penciling out and got worse and worse.  Rents were stagnant but property values were flying.  Some pretty simple math told me not to buy.

Now, Rosenberg is doing the math and telling us, the math isn't on our side.  $1.5T of annual deficit is returning $42b in new tax revenue against $50 to $150b new interest payments.  Houston, we gotta problem.

Think of this like a chess game where pawns and minor players are offered up as a set up.  We are being set up and Rosenberg and other smart guys get it...doesn't mean we know when gravity takes over but to be very aware we are straining against massive g-forces only propelled further by debt fuel.  Schiff, Rosenberg know our fuel will run out...what happens from there is likely the stuff of sci-fi and bad 70's Charleton Heston movies :).

Lucius Cornelius Sulla's picture


I was ready to start investing in RE in 2003 and didn't because the numbers didn't pencil out.  Proof positive that it doesn't take a genius to know when there is an asset bubble.  It also proved to me beyond any doubt how crooked the bankers and politicians are.

Hero Protagonist's picture

I can hear the response now to a negative Q[fill in the number]:

"Don't look backward, look forward. Q[fill in the number], looks extremely promising."


hambone's picture

Folks - we's a dying on the vine...

We have an annual deficit of $1.5T (12%'ish of GDP) in transfer payments via Treasury borrowing, etc. yielding a 2% growth in GDP ($280B). That's an ROI only the government could love.

Ahh, and the payments on each additional Trillion (now $14T of them) will be from $35 to $100 billion a year ad infinitum (unless we continue to buy all our debt ourselves (and destroy the dollar) and we only buy on the shortest of maturities which are the cheapest but most vulnerable to an interest uptick).

Our "growth" is far offset by the debt we are taking on to produce the "growth". Just servicing the growing national deficit will soon (2015?) suck up 50% of all tax receipts (currently $2T'ish annually). We are in the death spiral of needing to borrow greater and greater money just to pay our deficits. Only way this borrowing would make sense was if it resulted in GDP gains (and resultant tax receipts) outstipping the investment.

And this doesn't address the need to fund the $100T of unfunded liabilities, pensions, blah blah (either by reducing payments and ratcheting down future spending due to the lower benefits or increasing taxes to pay for said bene's -but no matter what you do, they all result in lower GDP).

Enjoy the death spiral Bitchez!!! WEEEEEEEE!!! It's going to be a very rude awakening soon for Jon Q. Public when this game blows.

chet's picture

I just watched the documentary "I.O.U.S.A.", which was in production during the crisis, and came out at the end of 2008.  (It's depressing.) 

Anyway, it was talking about the debt at $9 trillion at that time.  Here we are two years later at $14 trillion.  Parabolic.

hambone's picture

I should complete this -

$280B growth in GDP = $42B in increased tax revenue (assuming 15% as per the rest of tax on GDP) to service $50 to $150B in increased interest payments from the new debt incurred.  ENTER THE DEATH SPIRAL.

And really, btw, we need a much higher GDP to be able to make up the unfunded's as well. 

And really, really, we need a much higher GDP to be able to raise interest rates back to "normal" so the Fed has a policy tool to fight the next recession, and we need much higher GDP to allow for higher employment, wage increases, tax revenue increases w/out tax rate hikes, and lastly an "exit strategy".  FOOOOOKed we are and how does the market react to the slow death of America, with thunderous applause and a push for new highs.

morph's picture

Try explaining the law of diminishing returns to the people that call the shots.

In the UK they think growth is the answer to the deficit! They do realise their spending is leveraged in that it needs to generate about 10 times its value to pay for itself!



DonutBoy's picture

There is no way out.  The dollar will be crushed as all fiat currencies are.  It may not be a death-spiral though.  Think about going to bed one night and the next morning being told your dollars are worth 1/20'th of a newdollar, and that all of your checking, savings, and money-market accounts were conveniently converted to newdollars over night.  What insurance policy do you have in place that keeps some of your wealth with you across the boundary?


huggy_in_london's picture

actually thats not right.  The usd dying does not mean other ccy will.  The collapsing USD just widens your trade deficit.  The problem, actually, is yours.  

aztrader's picture

This inventory rebuild is more likely out of fear of inflation in Asia more then anything else.  Shipping charges are going up in January and I am already seeing prices rising on what I purchase directly from China. 

SDRII's picture

Worse than that

What Rosie didnt say is that of the PCE growth most came from hosuehold services (utilities 47bps of GDP growth). One wonders what the PCE deflator loosk like for these items vs. the headline. In other words the PCE services 107bps contribution to the headline growth came came froma  nondiscretionary sqyueeze vs. the discretionary items rolling over or going itno negative drag.

Pull up the rogoff comments to the money honey (CNBS) yesterday on pressing more forecful action to avoid deflation. While he may be right this time is different he still beats the dead drum of monetarists.

OutLookingIn's picture


 GDP for 2011 -2.5% to -3.8%

Except during a depression, GDP always makes a new peak before the next recession. This time GDP will see a new contraction instead of a new peak.


HarryWanger's picture

But this guy says: "


Double-Dip Risk Gone, 'Soft Landing' Ahead: Economist"

And then in what may be one of the most idiotic interviews ever, says:


He said the Fed needs an exit strategy for how it will begin normalizing monetary policy after an aggressive sequence of money-printing moves.

"That's the real risk here, not so much that the QE2 itself is going to make craziness happen, but they won't be able to dial it back at the right time," he said.

So my question to moronic economist is this: How can you possibly believe they won't be able to dial back at the right time and yet that won't lead to another recession? Sometimes these guys make absolutely zero sense.



TheSettler's picture

Sometimes these guys make absolutely zero sense. And you should recognize this Harry.

SheepDog-One's picture

'The FED needs an exit strategy'...and none exists. No retail suckers to step in and buy all the FED's wildly inflated valueless garbage off its hands.

miker's picture

The second wave down is coming and it'll be worse than the first.  Small businesses have been hanging on; hoping/praying (like our government) that things will turn.  They've cut to the bone and used up savings.  Many are starting to fall.  Unless the banks step in and hand out free credit; there is going to be a sunami of business failures.  There is so much "fluff" in our economy; none of this can survive.  Do they get unemployment insurance.....most not.  And factor in those running out of unemployment benefits....we're in a real world of hurt. 

If you work in a corporate job, stuck in a cube all day you may not see it.  But if you're out and about and interacting with all levels of our society, it's there. 

Throw in further grid-lock/stupidity from these upcoming elections and we're primed for a real disaster.

centerline's picture

No one talking that much about local and state governments either.  If nothing short of a miracle does not happen soon, next year will be a bloodbath.  99er's falling off.  Pension funds struggling.  401ks being liquidated.  Etc.  Everything I look at screams deflation - which in turn screams QE.


Seems to me we are witnessing the beginning of a hail mary play here.  The media blackout on real news is insane at this point.



Kali's picture

Miker and Centerline-so true.  I do not work in a cubicle.  My small biz, still luckier than most, flat line, on verge of contraction. Many of my clients' bizzes not so lucky.  Have lost dozens this year alone, was able to make it up with new biz, but not so much anymore, hence the flat lining, no one has the extra cash or they don't want to spend the cash they have.  Forget about these small bizzes being able to get loans. 

Local govs are bust and raising taxes/assessments ruthlessly.  In one small city where I have clients, they were hit with a mind numbing "sewer assessment" for new sewers that were put in. Hit all bizzes in town with a $50/toilet assessment.  Immediately put some motel/hotels out of biz or in very dire straits, this on top of tourism being down this summer.  Now, since they lost some of the bizzes paying the assessment, they are raising the assessment for 2011 to $100/toilet, should just about kill the surviving hotels/motels.  The driver for all this was a residential development the city wouldn't approve without an upgrade to sewer system.  Now the rez dev is in the tank and the local bizzes are still stuck with the bill. 

My property tax statement just came in the mail last week, of course, it is higher.  My city is now talking of taxing "self employeds"/professionals/small bizzes who work out of their homes who weren't taxed by the city before.  Also used to exempt any biz in town earning under $25K/yr-not anymore.

I am at a loss at what to do.  Since some of my biz is out of country, have been seriously looking when I am there for relocation opportunities.  Small biz owners who still have something left and are able, are probably thinking like I am.  It may be time to run like the wind and get the hell out of here.

Captain Kink's picture

I just walked by a construction worker with an ipad.  Eating his lunch, using his 'pad.  My partner at the office offered to give me a set of clubs--he has 3. Walk through the streets of NYC, and still there is just so much crap to buy. Who needs more crap? the average consumer isn't just tapped's that they don't need another flat screen.  At the high end, ostentatios purchases are already gauche. Consumer confidence is a sham and consumer inclination is to hide in a hole (maybe play xbox or watch POTUS on the Daily show--what a joke!) and not come out.  Consumerism is dying.  Holiday "shopping" will be a huge bust.  and maybe we'll be better for it

food and rent and maybe the internet/cable bill is all that gets purchased/paid going forward.  Small business is the tip of the ice berg and the first to go.  we have so much capacity for everything that is pointless and valueless.  all excess capacity must be wiped out before a healthy foundation can exist.  unfortunately, we will have to pass through some very, very hard times. 

bugs_'s picture

Thats a scary article.  If Q4 GDP negative what are the chances of a negative revision for Q3?

centerline's picture

I think it is a given we will see Q3 revised lower.

Eric L. Prentis's picture

Forecast (final): Q3 negative; Q4 -3%

youngandhealthy's picture

Rosenberg is now in the Queen Elisabeth II camp which mean we have a new econimcal Titanic in front of us

gwar5's picture

I don't believe any of the economic numbers I'm seeing coming out these days. It's like opaque Chinese numbers that come out. 

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