Guest Post: GDP And Durable Goods - Heading To Recession?

Tyler Durden's picture

Submitted by Lance Roberts of StreetTalkLive,

At the end of August I wrote "Q2 GDP - Nothing Good Happening Here" wherein I stated:  "With GDP currently at 1.7%, as of the latest estimate, the decline in overall PCE, Goods, and Durable Goods, is very concerning about the next couple of quarters ahead. While the pick up in services spending (haircuts, accounting, legal, etc.) is currently keeping the current quarters GDP afloat - service related spending does not lead to substantially stronger economic output in the future. The real economic drivers are the manufacturing of goods, and unfortunately, that is where weakness is developing."  The recent release of the final estimate of Q2 GDP, and the September's Durable Goods Report, confirmed that indeed the economy was far weaker than the headline releases, and media spin, suggested.

While the media quickly glossed over the surface of the report there were very important underlying variables that tell us much about the economy ahead. The first chart below shows the differences between the 1st and final estimate of 2nd quarter GDP.


I have put the basic formula of the GDP calculation at the top of the chart and circled the relevant segments. The revisions between the first and final estimates of 2Q GDP showed that personal consumption expenditures (PCE) was just $0.5 billion stronger than originally estimated.  However, this reflects a sharp downward revision of 90% from the 2nd estimate which had shown a $4.9 billion increase. 

PCE is extremely important as it accounts for nearly 3/4ths of the entire GDP calculation.  These final estimates fall in line with recent discussions about the slate of economic reports which have shown consistent signs of weakness.  The purchases of Goods declined by $3.4 billion from the first estimate while durable goods, those lasting more than 3 years, were revised down by 19% to $2.5 billion.  Non-durable goods shrank by $4.9 billion as consumers curbed spending on apparel, food and electronics.  The saving grace, which pushed GDP from 1.5% to 1.7% previously, was the surge in spending on services which had surged by $7.7 billion.  That surge had been a "head scratcher" considering the weakness seen in other reports.  That overestimation was corrected in the final estimate of 2Q GDP as it was slashed by 52% to just $3.7 billion.

Exports, as discussed previously, have made up roughly 40% of corporate profits since the end of the last recession.  The recent announcements by CAT, FDX, NSC, UPS and others, all discussed the rising weakness with international trading partners - primarily in the Eurozone and China.  Not surprisingly we saw a decrease of $0.3 Billion in exports in 2Q GDP. This was a 110% decrease from the previous estimate of a $3.1 billion increase.  This decrease in exports is very important as it relates to current forward earnings estimates and the belief that the U.S. can remain decoupled from the rest of the world.   The following chart shows this is clearly not the case.


One of the big headwinds related to a continued push higher in the stock market is the rapidly deteriorating outlook for earnings.  Analysts forward earnings expectations are still very high relative to what the current economic outlook is likely to produce.  Coming negative revisions to estimates and corporate outlooks will likely shake the markets confidence.  

Finally, a big negative revision in Private Investment, which was revised lower to show a negative $35.6 billion contraction shows you exactly why employment has remained weak.  With forward outlooks of economic strength becoming less optimistic the drag from the reduction on capital spending is likely to continue.

As we have discussed previously this has been, by far, the weakest economic recovery of any post-WWII period. Unemployment remains elevated but has declined recently primarily due to the massive numbers either giving up looking for work or going onto some sort of welfare program that excludes them from being counted.  Economic growth, such as it has been, can be primarily attributed to continued rounds of artificial interventions and stimulus programs designed to pull forward future economic activity.  Of course, that begs the question of what will happen when we reach the future? Wages have remained stagnant, household net worth has declined for the longest period since the depression era and consumers are again being forced into debt to make ends meet. This all leads to a very sub-par economic growth rate as shown by the output gap between the real economy and what the economy should be producing.


Real final sales, which measure GDP less the change in private inventories, also slipped back below the recessionary warning line as expected.  Historically, whenever the year-over-year change in real final sales has fallen below 2% the economy has been in, or was about to be in, a recession.  The 2011 recessionary warning of final sales was averted by the "mother nature" effect, as we have discussed previously, as the impact of an unseasonably warm winter, falling energy prices, and the restart of a post-Japanese earthquake manufacturing shutdown, all collided to give the economy a boost.  Those tailwinds are not currently in the cards of rescuing the economy this time around.  


Furthermore, the recent builds in inventories, up $41.4 billion, are likely unwanted as product sits on the shelves collecting dust as consumer demand wanes. The real final sales number is a better indication of actual activity as sales declined from a quarterly change of .59% in the 1st quarter to .43% in the second quarter. This brings the year over year growth rate of real final sales to 1.99% down from 2.17% in the first quarter.  The trend is clearly not one of economic strength.

The release of Durable Goods Orders supports this decline in final sales and confirms a spreading of economic weakness in the most important parts of the economic equation.  New factory orders for durables plunged a whopping 13.2% in August after a downwardly revised 3.3% increase in July.  Leading the decline was civilian aircraft orders which dropped an astounding 101.8% for the month.  This has been one of those areas where new orders were being reported even as the economy weakened overseas - the reversion is now occurring.  Motor vehicles also declined 10.9% in the month as reflected by the decline in PCE.  

The chart below shows the annual changes in Durable Goods Orders as well as Nondefense Capital Goods Ex-Aircraft.  Historically, when the annual rate of change of these two indexes have simultaneously printed a negative reading the economy was in, or near, a recession.  As of the most recent report Durable Goods Orders showed a -6.7% annual decline while Nondefense Capital Goods showed a -3.1% decline.  


When trying to determine where the broader economy is headed an important indicator, outside of consumer spending, is Core Capital Expenditure Orders.  As we have discussed many times previously changes to the economy occur at the margin.  Therefore, by looking at core capital expenditures using a 3-month change of the annual rate of change - we can clearly see a weakening economic environment.  Historically, when this indicator, like so many others, has declined below -2% the economy has either been in, or was about to be in a recession.  Today, this indicator sits at -4.07%.


The bottom line is that there is further evidence of significant slowing in manufacturing in August.  While there has been some minor upticks in some of the regional manufacturing surveys in September - these are most likely bumps within a more negative trend as the cross currents from slower growth in Asia, and recession in much of Europe, continues to nip away at the very modest economic growth in the U.S.

How Close To A Recession Are We?

The question now becomes with the economic data weakening how likely is the onset of a recession?  The recent actions by the Federal Reserve to expand its bond buying programs by introducing a third Large Scale Asset Purchase program (QE-3) is clear evidence that they are worried about a further slide in the economy due to the pressures stemming from the Eurozone.   As shown above there is obvious weakness seeping into two of the most critical components of the economic makeup - consumer and business spending.

At the current time the U.S. economy is technically not in a recession.  However, as we have shown many times in the past that can change very quickly within a given quarter.  The trend of the data is clearly negative, and in many cases, is getting worse.  However, economists, and analysts, are quick to dismiss the trend of the data due to the Fed's recent endeavors into further bond buying programs.  However, as we discussed recently, there is little evidence that these programs have much effect on economic growth.


The problem is that there is little historical precedent in the U.S. as to whether maintaining ultra-low interest rate policies, and inducing liquidity, during a balance sheet deleveraging cycle, actually leads to an economic recovery.  This is particularly troublesome when looking at a large portion of the population rapidly heading towards retirement whom will become net drawers versus net contributors to the economic system.  Japan is the only country that has engaged in similar practices during a debt deleveraging cycle over the last 30 plus years.  The Japan experience has been that of a slow growth economy that has experienced rolling recessions roughly every three years.  Yet, we have embarked on the same path expecting a different result.


While I am not yet prepared to say that we are in a recession now, as opposed to the ECRI and John Hussman, my continued estimation is still that it is likely to occur in early 2013, however, at the current run rate of the data it could well be in the fourth quarter of this year. What is important, however, is that the evidence of the potential onset of recession is mounting.   

As my friend Doug Short posted today: "...the real per-capita demand for durable goods had increased substantially since the trough at the end of the last recession. But orders remain far below their respective peaks near the turn of the century and earlier. Moreover, the trend in the 3-month moving average in the last chart above has been one of contraction in 2012. This fact, together with the particularly ugly August data, will be seen by ECRI and others in the 'we're already in a recession' camp as strong evidence supporting their view."

For investors this is not a time to be taking on tremendous amounts of risk within portfolios. While markets can sometimes do irrational things in the short term - it is the underlying economics, and fundamentals, that drive long term portfolio returns. Taking on risk at the wrong times, trying to chase returns, can lead you into devastating losses that take the entire next upswing to recover. This has happened twice already since the turn of the century and it will happen again - it is only a function of time. The important point for investors, who have a limited amount of time to plan and save for retirement, is that "hope" and "getting back to even" are not successful investment strategies.

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DaddyO's picture


Hey Lance,

I don't know where you've been the last few years, but we're not "Heading", we've already arrived!!


whatsinaname's picture

Didn't Gundlach say buy Campbell Soup ?

They are closing factories. Also, did you hear about Gundy's stolen paintings and stuff. He has a reward for those to be returned.

Go Tribe's picture

I think he meant pallets of it, physical Campbell's Soup.

Snakeeyes's picture

Yes, this is a terrible signal of what is coming. The Fed shot its blanks at housing and forgot about manufacturing. Little mortgage lending, incomes declining, etc. ALL bad news.

JPM Hater001's picture

History is always written by the winners and I have a whopper of a story to tell.

I think I'll title it: "A Thousand Pretty Pictures.  How Chart Porn Saved My Life"

Squid Vicious's picture

bullish... no need to read all those confusing charts and numbers and stuff...

CrashisOptimistic's picture

Let's be clear about something important.

As of this moment there is NO, repeat, NO scenario for fiscal cliff resolution that is not either GDP neutral or GDP contractionary.

There is ZERO fiscal stimulus being discussed.  Either there is the full tax increase and spending cut, or there is a partial tax increase and partial spending cut or there is total, 100% no change from present policy.  The last option is 100% neutral.  No change from present policy is $1.25 Trillion deficit and 1.25% GDP -- meaning no change at all from how things are now.

If Congress and a President do some sort of deal -- ANY sort of deal -- that is anything other than leave everything as it is, then that will be GDP contractionary and all it takes is 1.25% of that to push into recession.  Leaving the tax cuts in place and not allowing the Sequester will result in another 1.2x Trillion dollars added to debt.

crusty curmudgeon's picture

"...all it takes is 1.25% of that to push into recession."

Oh, dear.  A recession?

I'm not trying to mock you but come on, man.  We're way past recession.

CrashisOptimistic's picture

Shrug.  The formal definition is flat or negative GDP growth for 2 consecutive quarters.  Cut spending or raise taxes and you take GDP off.  Odds are pretty good that will last two quarters, unless you think buoyant growth is coming.

crusty curmudgeon's picture

That's it...I'm going to have to go to the "MDB School for ZH'ers Who Can't Reason Good"

Westcoastliberal's picture

Hell, whatever "formal definition" of the economy doesn't come close to reality, so if the gov isn't interested in telling the truth, why crank out the numbers.  They're meaningless.  We're living in a world where trust is a relic of the past.

JuliaS's picture

Government being honest for 2 straight quarters? Pfft! When's that gonna happen?!

dbomb12's picture

About that 1.25 trillion dollar deficit, it is actually 11 trillion when you add in the unfunded liabilities

oldman's picture

Crash, come on, dude,

This is just sarcasm, right?

"If Congress and a President do some sort of deal --"      or

What is a 'Congress' or a 'President'----are not these words from an earlier century and now completely out-dated. Do you really think---well, I mean---things ARE different these days, are they not?

I suppose you will vote, also?

For the lesser evil, surely, because from following your posts---I'm quite certain that you will not be voting FOR any of these candidates----or will you?

As for me, I think there is a chance that the elections might be called off----'national security', you know-----good luck on your choices      om

knotjammin2's picture

If you look at inflation with the GDP we've been in a recession.

Id fight Gandhi's picture

Worse it gets more QE money. What's the problem?

Atlantis Consigliore's picture

1.25% DGP with 2.00 % Inflation =  Growth Recession/ Stagflation,

add 25 million businesses small w/ 50 or less employees layoffs shut down,

Capital and small business strike = Recession, 

Go text and tweet your Forward calls Phone with your worthless degrees as Capital moves offshore.

Yen Cross's picture

The 1st chart, last column. {Govt. consumption/expenditures and gross investment}, needs two additional indicators.

  [#1 SNAP/Welfare , #2 Regulatory] /sarc  

  That will happen when Energy/Commodities are factored into CPI.[never]

crusty curmudgeon's picture

Once you start taking issue with government statistics, there's no end to it.  One thing I'll never understand, for example, is how government spending is supposedly a positive measure of the economy.

Yen Cross's picture

 Ain't that the truth Crusty.

DaddyO's picture


Just like the gov creates jobs!

All the paychecks that gov prints started out in life as tax revenue. Money that will not be deployed in the private sector.


Things that go bump's picture

Unless it is crisp, brand new fiat created out of thin air, not even pretending to be based on anything as substantial as the disappearing tax base. 

RSloane's picture

You know how we always talk about fiscal armageddon on ZH? If [when] we go into another recession-depression we're doing so with high unemployment, high underemployment, high part time workers, announced high number of workers about to be laid off, people who have lost their homes, people who have lost their savings, people who are exhausted, suppressed wages, suppressed benefits, and people who are plagued with uncertainty about everything important in their lives.

I know I don't have to say it here but I will....Plan accordingly.

Westcoastliberal's picture

Wise words, R.S.  Go long Smith & Wesson and buy physical.

Go Tribe's picture

Better buy plenty of fire extinguishers.

css1971's picture

You remember how everyone said.

"if they outsource all the jobs, who will they sell stuff to?"

Things that go bump's picture

I believe we are destined to find out.

slaughterer's picture

and now both sides of the river there is goldman Sachs (bacteria)

GFORCE's picture

Turning Japanese I really think so. QE8 should just about do it. 

Meesohaawnee's picture

anyone want to tell that news to the equity ramp job be fine by me. but serious. as the cough,"market" acts today. Really Who the fuck reads or needs data anymore? Totally useless and today another poster child on the wall. You could have had a -5 gdp and you would still get the jam job you got today. DATA DOESNT MATTER!!

Westcoastliberal's picture

Getting a bit frustrated with those who only watch the "meters" of the economy saying we're "headed into" a recession.  As any small business owner (at least those of us STILL in business) can testify, we never left the first recession and things have generally been getting worse ever since 3rd quarter of 2007.  In fact from a small biz standpoint I would say we're well within the 2nd great depression with no end in sight.

Yen Cross's picture

 I'll give a "greenie" on that comment. The recession, factually, has not come close to ending.  14-19% unemployment.

  Another 5+Trillion dollars in debt, and a ponzified Housing Market, that is completely dislocated! Let's discuss the 3 million people that have left California over the last 5-10 years.

   I'm sure ya caught this link W/C/L

dbTX's picture

PM's away !!

LoneStarHog's picture

Take away goobermint spending - let's say conservatively 10% of GDP - and Hedonic Indexing and annualizing of GDP and we have been in The Greater Depression since the end of 2007 and/or the beginning of 2008.  And this soon-to-be Thanksgiving turkey appears to be WATCHING for some damn recession?

Note To Author:  Learn the art of Ompheloskepsis and leave writing missives to some author who has a clue!

mayhem_korner's picture



Whaddya think the 45 million foodstamp recipients and 22 million un- and under-employed feel about the thought that we're "heading into a recession"?

Ipso for Barry?

Tombstone's picture

No recession...the stock market is predicting boom times, having risen for most of the year.  And, as we all know, the market is never wrong.  With The Dictator being re-annointed in November, the S&P should have no problem hitting 1,600 by January.  Besides, Benny stands ready to buy,buy, buy.

RiverRoad's picture

If "getting back to even" means getting back to where we were in 2007, fuhgettaboutit.  That whole period goosed by subprime slime was a farce that never, ever, should have happened and which subsequently ruined the retirement nest eggs of millions of Boomers. Guess TPTB figured that what they had created they could take, and take they did.  That the Fed/Ben keeps trying to get "us" back there again is preposterous.  It ain't us they're worried about; it's themselves and their banks that they want back there again.  And the last thing they want right now is plenty of jobs out there which would give us inflation in a flash.  Put money back in people's hands, add a little velocity and....POOF!  Talk is cheap.

kalum's picture

Bernanke's ZIRP has ruined my life along with millions of retirees/savers and this will contibute to sending the country down the drain fast.How many elders has he forced into the home of their adult children?


Bernanke and his misguided policies. May he RIH

Shizzmoney's picture

I don't want to know when will be the tipping point that puts the economy into recession; I just want to know what will be the tipping point that the government and (neoliberal) academics who will finally admit we are already in a recession.

GreatUncle's picture

For Japan and seems many other economies are going the same way.

Then add this ...

The problem is that there is little historical precedent in the U.S. as to whether maintaining ultra-low interest rate policies, and inducing liquidity, during a balance sheet deleveraging cycle, actually leads to an economic recovery.

That is bull, it is not about a recovery path they have chosen but is about preserving the position of those at the top of the pile. Recovery or not that is not part of the plan.

Now join the dots ... Japan ends up in its position because the path taken was to preserve those at the top and never recovery.

Now join the dots ... Western economies are going to end up in the same position whilst they follow the same path that preserves the top above all else and disregards any recovery to preserve the top.

There ... where we end up you know who to blame. Japan should have purged itself of the problem a decade ago but it did not. Now it is in such a deep hole I can't see how they can ever now get out of the debt hole they are in. Do we have to go there? The top in western economies say yes ... bollocks thats what you want from my perspective and not where people want to end up.

Con job through and through and then all the stastics are manipulated like crazy to pretend it is all working out. That is all just part of the process cajoling us to get there. They could not continue without all the positive spin in the mainstream media as reality should prevent it.

Once in Japans position though you ain't got no way back period.

Grand Supercycle's picture


Longs please be careful.

Due to recent central bank intervention and short covering spikes, these daily charts are extremely overextended and significant correction expected very soon: