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Guest Post: Q3 GDP - The Devil Is In The Details
Submitted by Lance Roberts of Street Talk Live,
The good news this morning is that the 2nd estimate of the third quarter (3Q) GDP was revised up from 2.0% initially to 2.7%. This is up sharply from the 2Q print of 1.3%. As usual we will dig down into the numbers and look at the changes in the data but it is important to note that, as pointed out by Zero Hedge, Hurricane Sandy had NO EFFECT on the 3Q number as that event did not occur until the end of the 1st month of 4Q. The first chart below shows the gross change in the main components used for the calculation of GDP from Q2 to Q3.
The jump of $89.6 billion in 3Q was driven by a $33.4 billion increase in Personal Consumption (C), a $30.9 billion rise in Private Investment (I), $4.4 billion in Net Exports (X-M) and $21.3 billion in Government Spending (G). The next chart shows the percentage contribution to GDP that each of these primary components made towards the overall economy.
What is important to note is the large share, more than 70%, that the consumer makes up of the domestic economy. The purchase of services currently comprises more than 45% of consumption expenditures. The reason I make this point is that service related consumption has a very low multiplier effect in the economy versus manufacturing and production. The rest of the economy was driven by a 14.15% contribution of private businesses expending capital (notice that housing construction is a very small 2.72% contribution as I discussed yesterday), a negative 2.95% drag from net exports (exports less imports), and a 18.34% contribution from government spending which was primarily state and local.
While this data is interesting it really doesn't tell us much. The immediate response by the media was that this report on economic growth was a clear sign that a recession was nowhere in sight. This complacency is somewhat dangerous because the economy is not currently growing at a rate strong enough to achieve the "escape velocity" needed to maintain sustained organic growth. While the economy is not currently in a recession there are two very important things to remember: 1) The NBER doesn't look solely at GDP in determining recessions and expansions but rather the trends of employment, production, retail sales and incomes, and 2) it is not historically uncommon for GDP to tick up just prior to a recession - particularly when the bumps come from inventory accumulation. The table shows the annual rate of GDP growth the quarter before the start of an official recession. Sustainability of current growth is the real concern as we go into 2013.
It is already estimated the Q4 growth in the economy will again contract back towards the Q2 levels of 1.3% as consumer spending continues to retrench. The chart below shows the trends of the PCE component of GDP.
The decline in the strength of consumption is of obvious concern when considering the weight that it carries within the economy. The data trends contradict some of the recent analysis from mainstream economists that have stated that "healthier household finances are driving gains in confidence and spending." While consumer confidence may have improved recently it is much less of a reflection on improved household finances but a testament to the psychological impact of the media on consumer psychology. While spending on goods, and durable goods, picked up in the most recent quarter it was not enough to offset the declines in services which, as shown above, is a large component of overall PCE. Furthermore, the surge in inventories, which is most likely unwanted given the weakness in consumer spending, was 90% of the Gross Private Investment component. The balance of the increase in GDP in 3Q came from government spending which has virtually a zero multiplier effect in the economy.
There was an anomaly though in the government spending component of the 3Q GDP. Of the .67% contribution to the 2.67% annualized economic growth rate - the entirety came from a massive surge in defense related spending. There are two issues with this: 1) in the previous three quarters defense spending was a drag on economic growth yet in the month just prior to the election defense spending has a massive $20.9 billion increase; and 2) manufacturers in the various regions should have seen increases in new orders and backlogs which hasn't been the case.
One explanation for the surge is that the government was spending dollars ahead of the fiscal cliff recognizing the future defense spending will be drastically cut. Considering that defense spending was a huge contributor to the current quarter growth - it doesn't bode well for economic growth in the future.
As we discussed recently in regards to housing the increase in residential investment did provide a bump to 3Q GDP - however, it is a relatively small impact to overall economic growth today versus where it was historically.
Prior to 1980 housing was a major contributor to the overall growth of the economy along with automobile manufacturing. That is no longer the case as services have become a much larger share of overall consumption and exports are comprising almost a 14% share of GDP. Even a doubling of residential construction from current levels will only return the contribution to the economy back to levels where it was previously seen during recessions.
Output Gap Still High
The output gap as a percentage of potential GDP did narrow this past quarter from 6.01% to 5.78%. The output gap, which is the difference between real and potential GDP, continues to run at levels normally seen during recessions. The problem is that it has been nearly four years since the peak of the previous recession and we are still at a very severe gap. A quick look at history tells you that something different is occurring this time within the economy which is why continued artificial interventions have been required to keep it afloat.
This output gap also shows up when looking at GDP from a per capita standpoint. My friend Doug Short stated in his analysis of real GDP per capita (I highly recommend you read his article) that:
"The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. As we can see, since our 1960 starting point, the recession that began in December 2007 is associated with a deeper trough than previous contractions, which perhaps justifies its nickname as the Great Recession. In fact, at this point, 19 quarters beyond the 2007 GDP peak, real GDP per capita is still 1.45% off the all-time high following the deepest trough in the series."
Gross Domestic Income
Another big concern for the 3Q GDP is the decline in Gross Domestic Income (GDI). GDI is the total income received by all sectors of the economy including wages, profits and taxes less subsidies. In the latest quarter the annual rate of change in GDI rose at a 1.7% annual rate which was slower than real GDP. Since all income is derived from production (including the production of services) these two numbers should exactly equal. Furthermore, 2Q growth in real GDI was revised down to a -0.7%. History suggests that the weakness in GDI will lead to subsequent downward revisions to GDP growth in the future as shown in the chart below.
Real Final Sales
Lastly, the annual rate of change in real final sales of domestic product continues to decelerate and currently sits at 1.88%. Historically, when the annual rate of change of real final sales has been below 2%, the economy has been or was about to be in a recession.
The combination of rising levels of unsold goods (inventory), slowing sales growth and declining incomes all point to weaker GDP growth in Q4 and into the early quarters of 2013. Look for GDP growth in the 4Q to decelerate to 1.5% to 1.7%.
While there is currently not an official recession in the U.S. economy, as of yet, the details of the current economic growth are not ones of robust strength. Furthermore, we will have to wait for revisions to the current data until next year where we will see some of these anomalies revised away. With recent weakness in industrial production, capacity utilization rates and exports it is likely that there will be further deteroration of economic growth in the months to come.
If I am correct in my assumptions the economic underpinnings will continue to negatively impact fundamental valuations as profit margins continue to be compressed. Furthermore, the outlook by corporate CEO's for the next couple of quarters are not optimistic as top line sales and revenues slide. Any impact from the "fiscal cliff" or "debt ceiling" debate, a resurgence of the Eurozone crisis or some other exogenous event could quickly impact the markets.
While most of the media, and mainstream analysts, continue to focus on the state of the economy from one quarter to the next - the trend of the data clearly shows the need for concern. Of course, this also why Bernanke is already considering QE4. As I stated previously, while economic growth did pick up this quarter it is the makeup, and more importantly the sustainability, of that growth is what we need to continue to focus on.
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It's all a sham and a farce, numbers mean nothing anymore!
we're all oxpeckers now
“The output gap as a percentage of potential GDP did narrow this past quarter from 6.01% to 5.78%. The output gap, which is the difference between real and potential GDP, continues to run at levels normally seen during recessions. The problem is that it has been nearly four years since the peak of the previous recession and we are still at a very severe gap.”
Nauseating Keynesian bull shit. We know what the problem is, cheap credit and malinvestment.
Let the TBTF fail.
Cut spending to 18% of the GDP at the federal level.
Stop printing money.
Just stop it with the economic bull shit.
I thought the Devil was in the White House?
Hey! Ho! What is this an oil painting?
Indeed. In fact we now know that "growth" itself (the "p" in GDP) is a fiction since the totality of the economics profession simply substitutes "spending" for the who useless edifice. But how to increase spending when credit is contracting? Hmmmmm. "START A WAR!" is one way...unfortunately without a gold standard "how do I finance said fiatsco?" To which I answer NOT EASILY! The current variant ("Syria") seems to be financed "via print media." This could work! "You may have the war you are looking for kind sir." HOWEVER...who reads said claptrap anymore. Too few indeed. So what is our poor Napoleon to do? Le Fu Manchew? I say "adieu." Yes sheeple "we shall finance impending doom with adieu." Long, sorrowful, tearful...misbegotten "good byes." Ah my Naval Gazing...I wipe my handkerchief for your journey non. How can I express your nearness to my heart...your soft boosom to my heft. So lightly you bore my fruit. By the See calls ye Tufted Titmouse. Verily I beseech you...yet you journey to vast regions yet unexplored. But I digress...what was the story again? Oh, yeah. "An economy without means of payment." Hmmm..."a journey to parts unknown" indeed.
You mean autos parked on Dealers' lots, or "sold" with subprime loans aren't real GDP? Take that man's name!
Hold it hold it hold it...
Liesman called Santelli a Conspiracy Theorist (or some equivalent this morning) Santelli shrugged, Liesman went on to dissect the numbers and kinda concluded that the Goobermint contribution was probably too big then Kiernan interjected some tripe about "rising above" and that starting at 2.7% is a pretty good start if that's where we're really starting from unless we're really starting somewhere else and all the while Santelli looked like he'd already had a long day with a bunch of manic kindergarteners and Liesman went on to basically (absurdity) say (quoting God) that "It was Good" even though he said the numbers weren't any too swift. And then Becky mumbled some horseshit that I could not for the life of me understand as it seemed like my brain had shut down from all the stuff noise and static nonsense which made no sense. In fact for a moment I wasn't sure they were speaking in English.....
So everything's ducky!
Oh good, because I was starting to worry. Glad to know everything is fine..... I'll go back to mindlessly consuming ( ) insert your favorite ithingy and twinkies.
I, too, am proud to be an Amerukkan!
Say it again Lance, QE4. Was it just a year ago when the big debate was whether we needed QE2? Now we blew past QE3 like a fart in the wind and here comes QE4. So yeah lets talk about nonsense horseshit and just make pretend 85 billion a month is not being thrown into the black hole.
Preach it brother Fonz... preach it!!
$85 billion a month. Think about that. That is a crazy large number. Hyper-inflation can't be all that far ahead.
I wonder what this time next year things will look like? Any price predictions?
Everybody, I used to feel the same way (hyperinflation). But I am really starting to rethink that. If people are deleveraging, and by that I mean defaulting on debt, not paying it down, then the 85 bil is offsetting that. Also if wages are stagnant/falling it makes hyperinflation hard to see happening as well. If Ben was sending that 85 bil to each citizen we'd have hyperinflation in an instant. But he is just making bankers rich the way he is doing it.
But the end of the road is inevitable. The debt will crush us. If gas is $5 a gallon and milk and bread cost $7 that may as well be hyperinflation when you are piss broke.
Next year I would guess the 10yr hits 1.25% at some point. The market drifts higher as everyone crowds into anything with a dividend. Commodities drift lower. All asset bubbles inflate to a point where even most of the hard headed bears think about cratering, and many will. Then.....BOOM. Maybe that boom is 2014 or 2015 or who knows. But as the guy in the matrix said "That is the sound of inevitability".
Ben thinks that $5/gallon gas etc is fine, because he assumes (incorrectly) that wages will catch up. I remember the '70's when $20/tank to fill a gas guzzling 500 cubic inch American machine seemed insane and took a major bite from the average person. Now, most would see $20/tank as Godsend, because wages did catch up, at least in part. What Ben doesn't realize is that 40 years of offshoring has eliminated the wage-increase effect of broader inflation. The consumer still has demand, but no money other than CC debt. Because the middle class has been crushed by 40 years of supply-side economics and wages replaced by easy credit. It's remarkably simple, really, but those at the top don't care because they've got theirs.
LTER do you really believe that about Ben or do you think it is more realistic to think that he understands how far gone everything is and is just enriching the shit out of his buddies before they burn the house down? I mean at this point when the break the huddle and his bald head walks up to that microphone even he has to think "I'm goin in with QE4....this shit is going to blow any minute now".
I don't know. I go back and forth on this question (whether he believes his own bullshit, or whether he merely has his own self-interest in mind). My best guess is that he believes he can navigate the problem in a way that his buddies who will take care of him are enriched and the status quo maintained. But I don't discount the idea that he is operating entirely in a world of pure self-interest where he sees himself at the top of the heap and doesn't give a flying fuck what happens to the rest of us.
In some demented way I could see him thinking he is patriotic. He sees himself holding this whole thing together with duct tape. I think he is one question away from giving his own version of the "You want me on that wall, you need me on that wall" speech. He wants to scream that we better learn to embrace this shitty economy because the alternative is a collapse of the currency. He and his buddies know that the leavee is going to break. When it does they will all be positioned for it. They will quietly clean up afterward. That is my best guess.
I would argue it's not "supply side economics" PER SE but "crazy marketing of debt to people who have no business even having money"...the word "students" comes to mind. We're SUPPOSE to be hungry when we go to school...that's why they call it "an education." When you or I or Simone else is "sold into debt slavery"...has the Governmnet explained this yet?...the "bondage" that results is catastrophic...FOR EVERYONE. (Save the media which always craves attention more than you and I.) sorry but I'm not sure "Syria" (tm) can bail us out of this one. Sandy has opened a lot of eyes to just how little "Government"...let alone "Banking" (tm) even exists anymore. "We're all just trading platforms now." Only this time "in the game of life itself." SAC...big as it is...is "small potatoes" next to the real big ones in "the dark rooms of Bloomberg" or the "mainframes at Langley." These machines give the wannabe wealthy and the wannabe powerful the illusion that "they didn't just do that" but indeed they..."have" done it (meaning set events in motion that cannot be undone or impeded). though it be a .exe that "finished the plan" or "completed the mission" let us never forgot The who, the what and the when that started it. Remember folks "the only way to win is not to play." And methinks the whole world is about to see the meaning of that phrase...in just a few weeks? Maybe even less. "The Third World War lasted a decade. The fourth only a few minutes."
"Long F 35 fighter jets." I'll open at a billion...for ONE.
It's worker pensions that are the problem. Entitlements for the military industrial complex are off limits.
Growth is easy when you channel stuff, inventory build and cook the books!
That's the hard way actually. The easy way is to monetize 25 billion a DAY "and let someone else worry how the money is being spent."
Gubbermint
Deficit
s Pending
Take note of the Hilsenrath Index...when he prints, things are worse than you think and RISK is cued "ON"
I would have thought by now that we would have had a more dramatic increase in GDP due to the increase in ink cartridges and rolled linen paper. No?
GDP is only growing if you believe government statistics.
http://www.shadowstats.com/alternate_data/gross-domestic-product-charts
Who to believe...who to believe...
GM dealers in midwest sold lots of USED cars a couple of months back - abnormally large volumes. There's your pulse check on the backbone of America. Channel brimming, absolutely brimming with new inventory, yet the second-hand goods keep moving instead.
what about likely strong consumer spending (consumption) in current quarter?? Over the total Thanksgiving week people spent more than previous year.. Consumer confidence & housing sales are also at a four or five year high which is only great for the current quarter.
There definately was this 'herd' mentality. People felt like they had to spend to buy the latest stuff (mostly designer clothes & yet another smartphone at full retail price)
Mark Faber stated that the economic data coming from the U.S. is total propaganda using heady hedonics comparible to the nazis economic data figures they released in the 1930's showing insanely unrealistic growth. All these lies about the real state of the economy will be good for us precious metal hoarders though:)
cnbc dosn't dare say GREEN SHOoTS..if they did even the dumb shits still watching cramer might go HUMMMM.