The Channel-Stuffed GDP Report

Tyler Durden's picture

Via Jeff Snider of Alhambra Investment Partners,

I don't think there was much in the GDP report that wasn't expected, except durable goods.  The decline in durable goods was comparable to Q2 2011, right down to the primary driver of that weakness - motor vehicles.  However, there was no earthquake in Japan this year to disrupt supply chains, production schedules and brand availability.  Just like last year, marginal economic growth overall seems to be backfilled with a tide of inventory.  The trouble with inventory at the margins of growth is that it is essentially a build-up of forward demand, and therefore susceptible to reversal should overdone production move out of alignment with final demand.  Both monetary and fiscal policies actively seek to pull forward demand, meaning this inventory-driven activity conforms to policy goals.  This is true in perhaps more ways than expected since the heavy arm of fiscal activism is readily apparent in an important sector of the marginal manufacturing economy.

That brings up a bit of a curiosity since durable goods "sales" of motor vehicles should be largely in sync with durable goods "output" of motor vehicles:

"Sales of MV", contributions to GDP past 5 quarters       -.53  .05  .63  .31 -.29 

"Output of MV", contributions to GDP past 5 quarters      .05  .03  .55  .72  .13

That's a pretty big deviation in the past two quarters.  The “sales” figures include the sales of motor vehicle parts, while the output figures do not, but I highly doubt the marginal difference is solely a collapse in parts purchases.  It might be a statistical anomaly that gets revised away but it might also explain some of the recent weakness of the regional Fed surveys and the ISM manufacturing survey. 

Clearly weakness in Q2 2012 PCE is attributed to the change in the direction of durable goods (from +13.9% and +11.5% in the preceding quarters to -1% in Q2 2012); durable goods added .85 to GDP in Q1, but subtracted .08 in Q2.  It is also pretty clear that durable goods weakness itself can be mostly attributed to weak motor vehicle sales (and parts).  Spending on nondurable goods was largely unchanged from the preceding quarter, while spending on personal services was slightly higher (due largely to the economically “beneficial” pickup in spending on “housing and utilities”). 

MV sales are highly correlated to income growth, but there is also a credit availability component.  I haven’t seen anything recently in the consumer credit numbers that suggests there are any financing-related issues.  Is this perhaps a price issue?  Both sales and inventory figures in the GDP release are reported in dollar terms, so it is possible this is a function of price markdowns after leaving the factory.  That still ends with the same result, however, slowing future production in response to an imbalance of supply and demand.

According to in February of this year, inventory levels are still below historical run rates for the domestic manufactures, though they have risen steadily at GM and Chrysler (as pointed out on ZeroHedge  Ford, on the other hand, has actually trimmed its inventory/sales ratio since 2009, perhaps suggesting that inventories are being more robustly managed to concur with a far different environment (and within the industry, inventories are obviously being managed quite differently with regard to government involvement).  Total car sales in the US peaked at over 17 million units, and even optimistic forecasts call for, at best, near 14 million units in 2012. 

This below peak buying rate has been used to build the optimistic case for auto demand since the overall age of the domestic car and truck fleet has increased from about 10.5 years in 2009 to about 11.5 years.  However, that trend toward “aging” vehicles has been in place for more than a decade – average fleet age in 2002 was 9 years.  If anything, the trend in the aging of the fleet has actually been relatively consistent since 2005 (with light trucks being held onto more than cars).  Since this trend pre-dates the Great Recession it should not be a surprise that turnover is reduced, meaning that sales growth marginally depends more on households buying additional units.  That’s an expensive proposition in the post-crisis period, especially in comparison to the housing bubble that preceded it.

In 2007, the number of motor vehicles per licensed driver, according to, was about 1.21.   That rate of usage has fallen off to about 1.17 since.  For a frame of reference, in 2003, just as the housing bubble was swinging into full gear, there were about 1.15 motor vehicles per licensed driver. 

Optimists see pent up demand in these numbers, but lack of per capita income growth may be keeping a lid on that potential demand.  In my opinion, it is likely that the amount of cars and trucks produced and sold in 2007 was another artifact of monetarism that cannot be repeated in the current environment.  After all, if there is so much pent up demand, then the contraction of motor vehicle sales in the GDP accounts is an empirical result that runs perfectly contrary to that optimistic expectation.  Given that there does not seem to be a contemporary problem with available financing (thanks in large part to Ally Financial, formerly GMAC and still sporting that hefty federal government investment) that may mean the industry as it existed pre-crisis is itself an anachronism, and perhaps much more sensitive to changes in real economic variables at the margins.  The big question for the economy is whether inventory and production levels are as sensitive.

Obviously, for the overall GDP accounts, the difference between sales and output is inventory.


Demand for durable goods and motor vehicles join a downward trend in the wider economy, showing up in gross domestic purchases and real final sales, and highlighting the disconnect with inventory:

A diverging trend between final sales and overall inventories, especially as they both intersect through the sensitive motor vehicle sector, is not an indication of future strength to me.  If the trend in the first chart is valid, we should ultimately expect the second chart to follow.  Maybe the economy is devolving faster than previously thought in the aftermath of financial dysfunction and the largely disabled/ineffective wealth effect.  We cannot ignore, however, that the intent behind increasing production may not simply be a function of pure market forces that will be solely respond to demand.  After all, GM proclaims it’s in a record-setting run despite the noticeable increase in inventory (in sharp contrast to Ford inventories), in what just might be a shadow stimulus.  How long can this trend continue before production overruns prove too costly?  Maybe GM’s stock price is an indication.

It's almost like the 1960's and 70's, with motor vehicles and government spending driving the marginal economy again.  All that’s missing is for Ralph Nader to show up and write about how cars are dangerous. 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
toady's picture

Wait, a talking head said durable goods improved when the report came out...

I guess she didn't read it. Had to beat the competition to the mic...

Unprepared's picture

According to me, the shuppets are (ch)anal-stuffed and ready for the oven. When is Saint Blankfein?

smlbizman's picture

in balt. county md....all the state trucks i have been seeing are brand new gm products,.... these replaced last years brand new products....

economics9698's picture

Spending the taxpayers money to make the pres look good.  All these fools do not understand that for every $1 they spend the private sector loses $2.2.  So while they think they are stimulating the economy and increasing Obots chances of winning re-election they are actually sabotaging his re-election efforts.

Economic ignorance taught at the high school, college, media levels courtesy of central banks and bureaucrats everywhere.

Sean7k's picture

This may not be stupidity.

What is the problem with a command economy? The production of goods without a price machanism to signal value. These cars are being produced to create jobs, but they are unable to sell because people do not want them at these price points. They are attempting to create demand through cheap credit options to sell products no one wants.

They are giving us a demand economy with an emphasis on psychological behavioral controls to create a demand that doesn't exist. 

They are attempting to sidestep the rules of capital and investment through the use of psychological controls administered through media, allowing debt to accumulate like an addict's first hit- free now, bankrupt you later. 

How much of our economy has fallen under the machinery of government? How much truly "private" production for real profit do we have? How much is it declining? How DEPENDENT are people becoming on a command economy structure? Enough to be willing to support it when it is exposed? 

Do the people end up choosing fascism because the alternative is so far out of reach, society would be devastated if it attempted to return to real economic production for profit? 

Seems pretty damn brilliant to me. 

RSloane's picture

^^ I can attest this is absolutely true.

Richard Chesler's picture

There'll be no crash until bears capitulate.

1000pips's picture

he's been sayin that for 10 years...

banksterhater's picture

Good job. With 5-7 yr subprime auto loans making up over 1/3 of sales, without that and forcing inventory on dealers, this is a conjob ready to plummet.

The Monkey's picture

These central banks are taking steps down the road of perdition. We've been in a period where the picture has been muddy. The picture is increasingly clear: there is no means of exit from experimental policy. Bernanke has decided to choose a different path from that which Japan suffered. The path is inflation.

kedi's picture

Channel stuffing is just making sure you get a well stuffed bonus this year, to hell with the future. Management doesn't give a sh*t about long term business stability, especially if it is a corporation. Even after looting it into the ground they get the golden parachute on top of the salaries and bonuses they basically stole when you look at the long term results of their greed.

Muppet of the Universe's picture

so how is this going to affect quarterly reports from auto manufacturers?  No sales combo'd with increasing inventory prod., storage, and maintainence costs...  This has been going on for sooo long, and how long it will last?  Who knows.  Will the gov bail autos out so they can build giant parking lots of inventoried cars like china builds ghost cities?

All I know is, When the global slowdown increases, what kind of impact will decreasing production rates have on raw materials?  For cars, the catalytic converter is key, and platinum is so necessary for efficiency:    How will a fall in production and thus inventories impact the gold/platinum ratio?  Will we see the golden .7?  Will Gold be allowed to take off and leave plat in the dust? Or will CB / PDB intervention and gld suppression smash it down again?

jerry_theking_lawler's picture

wrong....GM has 'revitalized' an old strategy....sell to subprime borrows.


haven't we heard this tune before? i'm sure all will END well this time....

banksterhater's picture

I'm sure I read subprime is 38% of sales, aren't they even "securitizing" them again? !

kedi's picture

Well there will be a ton of late model never driven cars for rental companies to buy cheap. Nobody can afford a new car so we can all rent. Or just remove and recycle the engines and park the shells all over the country for the homeless to live in. Use them to replace the trucking industry when the just in time inventory system only requires small car trunks to fulfill it's volume. Artificial corral reefs. Sell them as portable generators as the power grid continues to crumble.

Overfed's picture

It makes one wonder WTF they've been teaching in business school over the last 30 years or so. Whatever it is, it sure as hell ain't workin'.

RobotTrader's picture

The only thing that matters is that SPY and DIA are within a stone's throw of new 3-year highs, and millions of guys on the sidelines or short will have to reverse positions very soon.

The market is discounting a huge, epic boom in front of us after an extended period of economic weakness.

Aided and assisted by Central Banker "Gum Flapping", of course.....

Yen Cross's picture

 ROBO. Jeesus. I have a Heart!  Don't you ever get tired of the " zero" sum game?

  Have you ever heard of charitible donations?

  That wasn't my junk ROBO.

economics9698's picture

If we avoid war.

If we can eliminate central banks.

If we are not overrun by third world 93 IQ idiots.

If China adobts gold or silver.

A boom will replace this Yiddish created shit hole we are in.

sablya's picture

Epic boom?  Wow, I'd ease up on whatever it is you're smoking or whatever.  

disabledvet's picture

growth is slow...which has kept over all inflation contained. parts of the US economy are in total chaos...and have been for some time. stay long industrials as "operation flatten Atlanta" proceeds apace. not that insane wars abroad or "counterstrike by Syria" hurts this trade either.

DavidC's picture

Honestly, I really can't tell if you're being sarcastic or not (I'm presuming, from your last line, that you are, in which case those negatives should be replaced with twice that number of positives, because your humour is on a level being missed by many).


Cornfedbloodstool's picture

anybody watching this london BS?

slewie the pi-rat's picture

nader re today's edsel, tomorrow's pinto;  where will we ever put them all?

:> Prisons as Growth Industry <:

[& RIP alexCockburn]

Yen Cross's picture

 I'm here Slewie.  Just absorbing that R.N. contribution.

Missiondweller's picture

Thank god a new post. Watching Olympic opening ceremonies here in US and it boring as hell.

Atomizer's picture

You should of watched it this afternoon and freed up your evening as I did. Why wait around to watch a program for 3 minutes and be held hostage for 10 minutes of commercals. Winks

Atomizer's picture

Just watch the TV commercials. You can feel the tension. Rather than following GM's lead in returning your car to dealership if unsatisfied. Competing dealerships need to step up and offer more incentives to lure the broke ass consumer into a channel stuffed lot. How about, free test drives with a happy ending? Selling sex and automobile’s has been around for decades. LOL 

In other news today..

What a treat, Fair Isaac Corporation (FIC) rose to 10.21% today. Who would have thought a declining stock could make a sudden comeback over a Linkedin leak?

Rolls me eyes.

Demogorgon's picture

Fuck 'em all. I recently hit 50k miles in my '07 S2000. I'll run it into the ground before I purchase another vehicle. And when I do it'll be a used one. Not because I can't afford a new car, I just refuse to feed the multi-headed snake.

disabledvet's picture

Honda two seat roadster. Nice car. Had one for a weekend..."watch out for that hind end." She can break free if you're a little heavy on the gas...

toady's picture

Mine's a '97, and I agree!

Temporalist's picture
Douglas Keenan: My thwarted attempt to tell of LIBOR shenanigans

By Douglas Keenan
Financial Times, London
Thursday, July 26, 2012

Missiondweller's picture

And speaking of auto sales.

GM Ramps Up Risky Subprime Auto Loans To Drive Sales


ebworthen's picture

I'm seeing adverts promoting Adjustable Rate Mortgages to "Make homeownership affordable" again.

That's it, grease the rails that carried the last train wreck.

The brain trust of Washington and Wall Street blowing another bubble.

Also today - a spate of reverse mortgage commercials starring Robert Wagner and Henry Winkler.

I suppose when the banks own the homes instead of the Baby Boomers kids the banks will rent them back to them expensive like, or to all the illegal immigrants that we allow to walk (run, bus, drive, boat, stroll) acroos the U.S. borders?

I'm wondering why I need money or a job if everything is printed, handed out, or stolen?

toady's picture

I looked into those reverse mortgages and those people are simply insane.

They want YOU to pay interest on the home that you OWN! The fees on top of the interest were ridiculous too. They calculated my place @$700 a month for 20 years, way to low, then wanted $200 of that in interest and fees!

I kept insisting that they had to pay me interest because I own the asset, so it didn't work out.

Jlmadyson's picture

Yup, SUBPRIME game fully back on the table.

Yen Cross's picture

 Chris and Pitts / without the/ char coal! Come on Fellas?

  Speak or Squeak<   

                Does any one think T10's will widen next week?

emersonreturn's picture

the about a bank holiday.

Yen Cross's picture

 If ever? The new 991 (911) HAS DOOR MOUNTED MIRRRORS.  Sweet.

   I'm going to sell my 599 scagletti.

   I love  those :  Phase-3 poly elipsoid /convex beams on the 991! I have owned (3 )928's.

  I see where Ferdinand' is going!

Yen Cross's picture

    Girls love boys.  Women are beautiful

    I love GIRLS! They are so copacious.  Women are the, best of the best!



                        No Man was made / without a Beautiful indiginious (woman)

q99x2's picture

How about we get the Chinese to buy them to fill the parking lots and streets of their empty cities that they built with the US tax dollars and US manufacturing jobs. The ones the banksters stole...Those M'fn, M'Fers.

Rentenmark's picture

"No earthquake in Japan"  what about the drought across the states?  That has to be worth some kind of negative, right?  Plus, there must be anticipation of everyone watching the olympics.  Not to mention the worry of snow this winter. Nothing but one time events, nothing to see here thats the ticket!