Rosenberg - Expect Big Time Revisions To The Houdini Q4 GDP
Rosie already shared some insights on last week's blockbuster GDP number. Today, he refuses to leave the topic alone, and warns investors to "expect big-time [downward] revisions." Additionally, and more relevantly, the entire validity of the economic reporting segment of the administration is put into ever greater question, and with good reason: "if you believe that GDP result, then you de facto are of the view that all of a sudden, with no capital deepening or major technological change in the past half decade to speak of, the potential growth rate in the United States has reached an epic scale of 7%." And this key reading into the divergence between pumped-up and real revenue growth "When one weighs in a zero Fed funds rate, $862 billion in “stimulus”
(and counting) and $700 billion in bank and auto sector bailouts, sales
should be running at a 10% clip by now — not 1.7%." With economic data increasingly unreliable (to keep it politically correct), and China having the ability to make or break the U.S., what is the point of continuing the charade that the U.S. is nothing more than an extension of the Chinese experiment across the Pacific.
The U.S. GDP data belied credibility but as we saw with the advanced third quarter data, expect to see significant revisions; that initial Q3 report of 3.5% was eventually cut back to 2.2%.
But consider that never before have we seen a 5.7% GDP growth rate in a quarter when the aggregate workweek was cut by 0.5%. There is no way that productivity is running as high as the data suggest. Either the hours worked and employment data are wonky (though the jobless claims data are still consistent with moderate job loss) or the GDP data are wonky, or maybe they both are.
Here is another way to assess the data: We saw history in the making — an eye-popping 5.7% GDP growth rate the exact same quarter that the unemployment rate rose 40 basis points, to 10%. It is like Houdini’s rabbit! This has never happened before. Normally, when we see a GDP number like this the unemployment rate declines 20 basis points during the quarter in question. The flip side is that in the past, when the unemployment rate rose as much as it did in the fourth quarter, believe it or not, in those quarters real GDP actually contracted fractionally (at a 0.5% annual rate).
We went all the way back to 1947 and so we can say with 100% confidence that at no time in the past 62 years has a 5.7% GDP advance coincided with such a rise in the jobless rate. It makes no sense. In fact, if you believe that GDP result, then you de facto are of the view that all of a sudden, with no capital deepening or major technological change in the past half decade to speak of, the potential growth rate in the United States has reached an epic scale of 7% (the growth rate in the economy that keeps the unemployment rate stable) using a classic Okun’s Law rule.That is really tough to swallow. As we said: expect big-time revisions.
Not only that, but the same holds true for that University of Michigan sentiment reading in January. At 74.4, it is right in line with recession averages but supposedly, the recession is over. If this was truly the end of recession, the UofM would be closer to 78; and if it were a true expansion, or at least how an expansion was defined in the post-WWII era, then the index would have already broken the 90 barrier. We couldn’t help but notice that even as the mainstream economists were waxing over the UofM data on Friday, and even as Mr. Market was heading to the hills, that both the homebuying and the auto buying intentions fell on the month.
As we said in our Friday note, the really big deal in the U.S. GDP report was the slowing in real domestic demand, to 1.7% annualized in Q4 from 2.3% in Q3. Consumer spending actually slowed to a 2.0% annual rate from 2.8%. Here we are, eight quarters after the recession began, and real GDP is still 1.8% below the level prevailing at the onset of the downturn back in the fall of 2007. Until now, it has never before, at least back to 1947, taken more than eight quarters to re-attain the prior GDP peak (it usually takes between four and five quarters). These did not make the headlines.
When one weighs in a zero Fed funds rate, $862 billion in “stimulus” (and counting) and $700 billion in bank and auto sector bailouts, sales should be running at a 10% clip by now — not 1.7%. Therein lies the rub. While the ballooning federal debt is providing an antidote, make no mistake — the future drain from surging interest payments is going to pose a dead-weight drag on the pace of economic activity for years, if not decades, to come. Today’s stimulus-led growth, in other words, is going to come at a cost — not today, but down the road to be sure.