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3 Things: Just The Weather, Deflator, Import Warning
Submitted by Lance Roberts via STA Wealth Management,
Just The Weather?
The reason Wall Street, the IMF, the NBER, or any other agency have never predicted the onset of recession in the U.S. is simply due to willful blindness. The latest report on economic growth is a great example of this.
While the majority of Wall Street economists had predicted that the first quarters GDP growth rate would be 1% or higher, I have repeatedly suggested that it would be closer to ZERO. To wit:
"Secondly, core CAPEX has been negative on a monthly basis for 6-consecutive months. Since 1992, there have only been 5-instances where core CAPEX orders have been negative for 4-or more consecutive months. The first three instances were leading indicators of future recessions. In 2012, there were 6-consecutive months of decline as the economy got very close to a recession but was saved by Central Bank interventions and the warmest winter in 65-year. The latest core CAPEX decline capped a second 6-month period as it appears that Q1 GDP will ring in close to zero."
"I am not suggesting that the economy is about to slip into an immediate recession. However, I am suggesting that underlying economic strength in the U.S. is likely much weaker than headline statistics indicates."
Also Read: 4 Measures Warn Of Rising Recession Risk
As we know now, the majority of Wall Street economists and analysts were wrong, as usual, as first quarter's GDP rang in at just 0.2% growth.
However, instead of recognizing the sluggishness in U.S. growth for what it is and has been, the Wall Street media machine begin to instantly provide excuses for the weak data print - "it was weather related."
The problem with the "weather excuse" is that temperatures were only "much below normal" in a relatively few states. The map below shows average temps across the U.S. for the 2014 winter period. Importantly, three of the most populous states - Texas, Florida, and California had normal to above normal temperatures for the winter period. But then again, maybe it was just "too hot" for shoppers as well.

However, and importantly, this is why the Bureau of Economic Analysis "seasonally adjusts" the data to account for winter weather that tends to, surprisingly enough, happen during the winter.
Lastly, let's not forget that while economists are blaming the weather for weak first quarter GDP growth, they were also the ones that said GDP should get a boost from lower gas prices. So, assuming they right, then the savings from lower gas prices on a national basis should have offset any drag from weather related issues. Right? (Read this for why that didn't happen.)
It is important to remember that the reason that Wall Street and the media are always "optimistic" is because that is what creates revenue for them by keeping you invested. However, dismissing data points with overly simplistic excuses in order to support the "bullish thesis" will eventually lead excuses "why no one could have seen it coming."
There is mounting evidence that the economy is ACTUALLY slowing and weaker than headline statistics currently suggest. Furthermore, considering that the current economic expansion is already one of the longest in history, it is only logical that we could very likely be closer to the end of this particular cycle than not.
While I am not suggesting that we are about to plunge into a recession, it is important that we pay attention to the underlying data trends. This is particularly the case since major stock market declines are historically coincident with the onset of recessionary drags.
Deflating Deflator
Speaking of "data trends," Michael Lebowitz at 720 Global noted the very important, but receiving little attention, deflator in the most recent GDP release.
"At -0.1%, the first quarter of 2015 marked only the third time in over 65 years the GDP Price Deflator has been negative. Additionally concerning, the trend in this indicator since 2000 has been downward sloping."
As noted in the chart above, peaks in the GDP deflator have been either coincident or leading indicators of economic weakness.
Despite claims of "winter weather" being to blame for the latest slowdown in economic growth, the GDP deflator confirms that economic "strength" ended in 2010. Of course, since that time the economy has far underperformed economic expectations from EVERY economist and the Federal Reserve.
Furthermore, the declining trend of the GDP deflator suggests that economic weakness will likely continue to confound lofty hopes of economic acceleration in the near future. Again, from Mr. Lebowitz:
"Although the Federal Reserve referred to this evident deflation as 'transitory' in today’s FOMC meeting statement, the durable trend indicates otherwise.
As highlighted in our prior analysis 'The Humility of Rates and the Arrogance of Equities', real GDP growth is also on a downward sloping trend. The combination of GDP and inflation falling in concert should heighten concerns for investors about the true state of the economy. The data suggests any near-term rebound toward what is historically believed to be trend growth is unlikely. With such disappointment in economic growth comes a challenging investment landscape."
Again, I repeat, in history the largest financial market corrections have been coincident with the onset of recessions. Just something worth remembering since by the time a recession is "recognized," it will be far too late to do anything about it.
Imports Tell A Story
While much of the Q1 slump was attributed to weather related issues, one of the more telling points of the report, as it relates to real economic strength, was the plunge in imports. The reason is two fold:
- The strong dollar makes imports cheaper which should have provided a boost to economic growth, and;
- All those savings from cheap gas should have resulted in higher imports, but they didn't.
However, the slump in imports was not JUST a Q1 anomaly and is something that I have highlighted previously:
"Note that both the annual rate of change in imports and exports have now moved into negative territory. Importantly, notice the extremely sharp decline in imports which suggests that despite lower gasoline prices, the contraction in domestic spending is much sharper than currently realized.
However, as shown, when both imports and exports have contracted to negative levels previously it has been coincident with a recession."
While the decline in imports was quickly dismissed by the media as a "weather" related event, there may be more to it than just that.
The story that imports may be telling is of a consumer that has reached the limits of their disposable incomes due to surging healthcare costs and lack of income growth.
While it is entirely likely that "economic bulls" will get a bounce in Q2 and Q3 due to pent-up demand from the previous two-quarters, the strength and sustainability of that bounce will be critically important. After all, in just a few short months, the cold breath of winter will once again be upon us.
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Global weather models show us heading into a strong El Nino. Typically strong agricultural centers suffer due to overly wet or arid conditions. Deflation in corn, wheat, soy unlikely.
The models did last year too Zirp - or at least, the odds-on was that an El Nino was setting up firm. And then... Kali got a 'taste' of it in November of 2014 and it seemed like the drought might abate - then the weather literally stopped on a dime, and there was 0 precip for nearly (8) weeks solid, followed by a couple of spurts and then right back into the Western Sahara trend which is where we stand right now. Who knows, it could be a 'I'm gonna dry you out', and then, 'Apres moi, le Deluge'...
Obamacare premiums will put a dent in all retail; fine this year for not having it is now $395 or 2% of your income, whichever is greater.
no worry just put it on the ObamaCard! Debt doesn't matter!
Accepted at strip clubs and casino's everywhere, so don't leave home without it.....
It's not the premiums that will do the damage, it is the co-payments. Americans aren't a particularly healthy people and Obama was apparently disoriented when bending the cost curve, but even deweighing healthcare in the CPI (despite increased spending to stick-save GDP) will not change reality of the increased cost of healthcare (as opposed to non-insurance) at the individual level.
We left history long ago....with a Global Printfest and Moral Hazard No Longer restraining anyone(though Yellen does look like a Virgin...I mean who would...)....we could go to DOW 50000 with a negative GDP as far as the eye can see.
"After all, in just a few short months, the cold breath of winter will once again be upon us."
What? No summer and autumn this year??
If ur not swimming to cool the body core ~ I just call it seasonal hell! The rest of the year makes a nice summer. But pretty soon we will be in hell here in Texas.
I have 3000 uvxy now.
Guess that's going to have to mean Dow infinity on negative GDP.
It's on me~ u all will have to pay for u own popcorn though!
Since bad(winter) weather is a main cause to limited growth, then pleasant weather in Q2 would also have the same attribute as a positive effect. Doubt that will make it as a talking point in this fairy tale.