Gary Shilling: "Q2 GDP Was Closer To 1% Than To 3%. It Could Even Be A Negative Number"

Tyler Durden's picture

This week, in the aftermath of the Q1 -2.9% GDP disaster, the biggest "non-recessionary" drop in 67 years which was blamed on harsh weather (because there have never been harsh winters in the past 67 years), we get the first glimpse of what Q2 GDP was in the US economy. It is expected to print just shy of 3%. However, one person disagrees: Gary Shilling believes that not only will Q2 GDP be closer to 1% than to 3%, there is a fairly good chance it could be negative, which of course would mean that the US economy has officially entered a recession.

Shilling's take:

Special Report: No Spring Thaw

The consensus of economists looks for second quarter real GDP growth, which will be released July 30, of 3% vs. the first quarter at annual rates. It believes the 2.9% drop in the first quarter was cold weather-driven, and a rebound in the second quarter is the prelude to 3%-plus growth in the second half of the year. As in the last several years, the herd is likely to be disappointed.

Consumer spending is 69% of GDP and it barely grew in the quarter. According to monthly data, real consumer spending fell 0.2% in April and 0.1% in May. June’s numbers aren’t released yet, but based on the correlation with retail sales, which are available for June, real consumer outlays rose just 0.1%. The jump in March from weak January and February gave consumer spending a higher starting point for the second quarter so we believe it rose 1.3% from the first quarter.

With the ongoing business cost-cutting and job growth focused on hamburger flippers, hotel desk clerks and other lowpaid jobs, real wage growth to support consumer spending has been absent. Emphasis has also been on lower-paid part-time jobs. In June, they rose 1.1 million while full-timer positions dropped 708,000.

Elsewhere, real federal as well as state and local spending probably continued their declining trends. Plant and equipment spending didn’t help much. Volatile durable goods shipments rose just 0.5% in the second quarter from the first at annual rates, and that’s before reductions for inflation.

Residential construction was probably weak in the second quarter following declines in the fourth and first quarters. The earlier recovery in housing was driven by rentals, not new homeowners who are suppressed by uncertain jobs, low credit scores, the lack of 20% downpayments, huge student loan debts and the knowledge that house prices can and did fall by one-third. New home sales, the sequel to recent new building, slid 8.1% in June from May and were  off 3% in the second quarter from the first.

After declines in April and May in total private residential and nonresidential construction, June’s numbers, yet to be reported, would have to be the highest this year to keep the second quarter total from falling from the first quarter, before inflation reductions.

Net exports, the difference between U.S. exports and imports, were weak in April and May. Even with a $2 billion improvement in June, the quarterly total would knock $22 billion, or 0.5 percentage points, off annual real GDP in the second quarter. Note that the $70 billion drop in the first quarter cut real GDP by 1.5 percentage points.

The big unknown, as usual, is inventory investment. Since it’s the difference between sales and production, it’s highly volatile and notoriously subject to revisions. But barring a big jump in inventories, second quarter real GDP growth was probably a lot closer to 1% than 3%. It could even be a negative number.

A low second quarter real GDP number will kill the conviction that the first quarter drop was only an anomaly and it will spawn agonizing reappraisals for the rest of the year. It could put the Fed on hold at least into 2016 and be great for Treasury bonds. But for stocks, look out below!

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Eyeroller's picture

No way will the first number be below 2%.

Smoke and mirrors must be maintained at all costs.

Markets will rejoice because it is not negative.

It will be adjusted to negative later, but by then that will be 'old news'. 

 

TeamDepends's picture

Can we finally be adults and admit this is a depression?

wee-weed up's picture

Gov't manipulated numbers...

Reading goat entrails would be more accurate!

Winston Churchill's picture

And edible too.

Loves my chitlings.

ZerOhead's picture

TWO consecutive negative quarters is the official definition of a recession.

So if initial Q2 GDP prints -1.0% they must revise Q1 GDP down from -2.9 to -4.0% in order to make official Q2 GDP +0.1% and shazzam... no recession!

See how the magic works?

Tulpa's picture

Yeah that definition always struck me as a bit self-serving for the govt (not that that should be a surprise).  You can have 50% contraction in one quarter followed by zero growth in the next and not be in a recession.  It really should be defined as negative growth measured over a six month period.

Squid-puppets a-go-go's picture

anyone who says America is not currently in recession is engaging in a little (Baltic) dry humour

max2205's picture

That would be so awesomely bullish.....2,500 in weeks

CrashisOptimistic's picture

Bloomberg's economic calendar has consensus at 3.1%.

Tabarnaque's picture

I believe you misspelled it. That should read “Bloomturd”. ;-)

neidermeyer's picture

Real growth is dead , we just had the "actual wealth" story this week with I think a 43% drop since president Hussein... real estate everywhere is listed but not selling ,, nobody can qualify or has the expectation that they can maintain making the payments ...

tc06rtw's picture

You musn't call it a  Depression !

   — that would depress people —

Bossman1967's picture

Are you kiding me never will admit that untill the end thats a depression in this country

The Most Interesting Frog in the World's picture

A conversation I can only dream about:

To bad Mr. President, I'm in charge now not you. Now slide your neck under the big shiny sharp blade. Yes, like that, very good. Now, if you tell me the truth about 2nd quarter GDP, that big shiny blade will stay where it is and you are out golfing again within the hour.

OK, OK, I lied. GDP was actually negative 10% or something like that. We are not really sure. Funny thing is we had been fucking around with the numbers for so long we have no clue at this point.

Thank you Mr. President for coming clean on this matter.

Great, now let me go like you promised.

No :)

I am Jobe's picture

No we cannot as the masses do not know what GDP is and means. 

Ben Ghazi's picture

GDP?

 

Isn't that one of those cool drugs?

(like LSD, PCP or GHB)

edotabin's picture

"Can we finally be adults and admit this is a depression?"

We can, they can't...... but we don't count.

They offshored everything and there's nothing left. What is left is highly automated so there was no other logical conclusion.

ChanceIs's picture

Say whaaaaaaa?

Dis be de summer of recovery.

TheMerryPrankster's picture

Try some of dese green shoots my brother, guranteed kind, make you think the economies going gangbusters.

My man Obama turned me on to dese, he smokes em hisself. gotta em from bernanke - best skunk in da federal reserve. keeps it in his own private vault he does.

One puff and your GDP be trippin...and shit.

 

XRAYD's picture

It is NOT a depression. It is a crime. In broad daylight ... taking from those who have nothing or little (debt) and shovelling it to those at the top!

(More than 1/2 of if comes from the government anyway, and the other half from Fed.)

caShOnlY's picture

Can we finally be adults and admit this is a depression?

They can't admit a depression because that is the nuclear bomb of bad news and would send the markets soaring so high so fast they would lose control.

FieldingMellish's picture

Continual future hockey stick projections... all the way down.

exi1ed0ne's picture

What I find amusing is that despite the massive massaging of numbers that comprise official data, this is the best fudging we can get.  You'd think for trillions Uncle Sam squanders we'd have invented new forms of math or something to show how rosy fine everything is.  Even con job quality is going down the tubes these days.

whyami's picture

They did a great job on fudging the negative numbers and can't hide them further. You have to give them some credit on that.

The Most Interesting Frog in the World's picture

Can't we just erase that negative sign? No sir we can't. Oh Shut the fuck up already and just get it done. I'm getting ready to tee off damnit!

messystateofaffairs's picture

I think the con job quality is sloppy because the boat is swamping and TPTB are overwhelmed pumping out emergency bullshit.

TheReplacement's picture

That or we are far enough along that they don't feel the need to try as hard anymore.

yogibear's picture

The number 1 goal is to keep stocks going higher.

The Most Interesting Frog in the World's picture

IMHO I believe that WAS the goal. Now it's maintain reserve currency status no matter how painful for depositors.

laomei's picture

I'm guessing something like 1.5% at a bare minimum, later revised down to negative so the news can be that the economy entered into recession and talk about it in past tense, rather than in present tense.  In past tense, it can be mentioned as a quip and ignored, in present... that's a problem.  The Fed is basically all strung out and has no more tricks remaining, all stops are out and the only ones possibly left remaining were rather damaging ones which they have been struggling to undo.  The levitation at this point is all based on bullshit to keep the headlines looking good as they try to figure out a solution other than letting it all collapse.

Debtonation's picture

"But for stocks, look out below!"

More like standby for BTATFH

Ms. Erable's picture

Q2 GDP will be whatever bullshit number they want it to be; the economic metrics train left the reality track a loooong time ago.

TheRideNeverEnds's picture

furthermor, whatever number they print is will cause the market to go sharply higher and the number will be quietly revised down at a later date.

Dre4dwolf's picture

The idea that the central bank will allow stocks to fall is crazy.

The fed is already printing money essentially to buy out the equity markets.

The rest of the equity gains are from buy backs as ceos use corrporate cash reserves to fluff the value of their personal shares ahead of dumps

Tulpa's picture

The buybacks are mainly driven by corporations having nothing to do with the cash they're sitting on.  The IP and regulatory landscapes are just too hostile to investing in any actual wealth-creating business.

disabledvet's picture

Fox buying Time Warner. Rumors of an LBO of Coke. How interest rates can plunge given so much liquidity and carry is beyond me. I can't see what more the "growth authorities" could have done.

Sounds like a structural issue now.

TheReplacement's picture

Let's rise up and confiscate, for example, all stocks and bonds.  Those can be dispersed on a per capita basis - everyone gets some.  The criminals lose all and leave, go to prison, get death sentences that are carried out.  Everyone else would have interest (not really skin) in the game and the market would suddenly play itself out so that companies like Twitter either sink or learn to swim (call that a sell).  Actaully, I'd bet the masses would sell off straight away and tank it all.  There just is no winning.

bwh1214's picture

Not true, the Fed can effect the trend but can't prevent a crash. People can sell and make the market crash in a matter a minutes, the Fed is tapering and can not change policy to the point to stop a stampede overnight. I have no doubt that they could get the market headed north again, but that's the whole point of several of these ZH articles, if they do what are the repercussions? There are only about 11 trillion dollars, the three trill the Fed has pumped into the markets has been enough to push stocks, bonds, and real-estate to or close to all time highs, and debt to over 60 trillion. Imagine if the fed printed enough to jumpstart a crashing stock market, maintain real-estate prices and make the federal govt appear solvent. It will cause hyperinflation and they know it. They are walking a tightrope between Everest and K2, fall to the left and massive deflation, right and hyperinflation. I think inflation is the most politically expedient but I think a fall to the left is possible too. I do think they have a plan for a monetary shift but I won't get into that now.

You assume the fed can manipulate markets forever, but this is simply not the case, even thought it would appear to be true based on recent memory, but manipulation in financial markets always fails and theirs is already showing cracks.

 

bwh1214's picture

Not true, the Fed can effect the trend but can't prevent a crash. People can sell and make the market crash in a matter a minutes, the Fed is tapering and can not change policy to the point to stop a stampede overnight. I have no doubt that they could get the market headed north again, but that's the whole point of several of these ZH articles, if they do what are the repercussions? There are only about 11 trillion dollars, the three trill the Fed has pumped into the markets has been enough to push stocks, bonds, and real-estate to or close to all time highs, and debt to over 60 trillion. Imagine if the fed printed enough to jumpstart a crashing stock market, maintain real-estate prices and make the federal govt appear solvent. It will cause hyperinflation and they know it. They are walking a tightrope between Everest and K2, fall to the left and massive deflation, right and hyperinflation. I think inflation is the most politically expedient but I think a fall to the left is possible too. I do think they have a plan for a monetary shift but I won't get into that now.
You assume the fed can manipulate markets forever, but this is simply not the case, even thought it would appear to be true based on recent memory, but manipulation in financial markets always fails and theirs is already showing cracks.

bwh1214's picture

Not true, the Fed can effect the trend but can't prevent a crash. People can sell and make the market crash in a matter a minutes, the Fed is tapering and can not change policy to the point to stop a stampede overnight. I have no doubt that they could get the market headed north again, but that's the whole point of several of these ZH articles, if they do what are the repercussions? There are only about 11 trillion dollars, the three trill the Fed has pumped into the markets has been enough to push stocks, bonds, and real-estate to or close to all time highs, and debt to over 60 trillion. Imagine if the fed printed enough to jumpstart a crashing stock market, maintain real-estate prices and make the federal govt appear solvent. It will cause hyperinflation and they know it. They are walking a tightrope between Everest and K2, fall to the left and massive deflation, right and hyperinflation. I think inflation is the most politically expedient but I think a fall to the left is possible too. I do think they have a plan for a monetary shift but I won't get into that now.
You assume the fed can manipulate markets forever, but this is simply not the case, even thought it would appear to be true based on recent memory, but manipulation in financial markets always fails and theirs is already showing cracks.

TheReplacement's picture

I don't believe anyone who says things less than four times.

NinjaMonkeyFish's picture

Ummm ... central banks around our modestly insane little planet recently admitted to investing 29 trillion USD in market securities, including equities:

http://www.zerohedge.com/news/2014-06-15/cluster-central-banks-have-secretly-invested-29-trillion-market

 

bwh1214's picture

No and no, not even close. I love zerohedge but not all of the authors are created equal. You are a parrot and are not doing what you should be responsible enough to do, due diligence.

The story you sited incorrectly makes you think central banks invested 29.1 trill into equity markets when if you  would read the article they were citing to make up that “fact” they would find this.

The report, seen by the Financial Times, identifies $29.1tn in market investments, including gold, held by 400 public sector institutions in 162 countries.

This does not say anything about central banks though it may include some.  This is just stating the market investments of the 400 public sector institutions.  This, I’m sure, includes for the most part, sovereign wealth funds and public pensions, and it evens says that the holdings include gold.  So this makes perfect sense, heck the SS trust fund its self holds a few trillion in assets at current market rates (albeit worthless ones in my opinion). 

You know what if you are that ill-informed I’m not going to go on any further.  Be a little more careful what you read on the internet for god sakes.  I’m sure the Zero hedge contributors would say the same.

 

The Most Interesting Frog in the World's picture

I agree with you that is what they have done but IMHO I believe they are more worried now about protecting the dollar and maintaining reserve status. Tons of global pressure on the Fed including challenge from BRICS. Taper will finish and when TSHTF it's gonna be bail ins impacting, for the most part, high dollar accounts (at least initially). This time it actually will be different.

apberusdisvet's picture

Given that true inflation is most likely at least 10% YOY, it is unlikely that the GDP for this entire year will be positive.  HMMM.  How are they going to spin this one?