David Rosenberg Explains Why The Q4 US Economic "Decoupling" Is Over
Even as it is ending, the fourth quarter of 2011 has been one of dramatic inversions and dislocations, the two main ones being the decoupling between corporate profits, which have for the first time in years started sagging, as ever more companies pre-announce misses or outright disappoint on the top and bottom line, while paradoxically Q4 GDP is expected to post its best quarter of the year, and print somewhere north of 3%. Which in turn has led to the other great inversion: contrary to 2010 when the US growth was lagging and investors (who still harbor the foolish atavism of believing the market reflects the economy) were told to ignore the US and focus on the rest of the world, now we are seeing the traditional reverse decoupling being blasted from every legacy media mouthpiece: namely that the US can withstand the economic crunch gripping Asia and Europe (incidentally, neither forward nor reverse decoupling has ever worked in the history of the globalized world but knock yourself out). How does one explain this paradox? Simple - as David Rosenberg shows, the payroll tax cut, with its gargantuan $10/week benefit is completely irrelevant. The far more important one is that the average price of gas has tumbled from $3.77 ten months ago to $3.29 currently: "That is practically equivalent to a $70 billion tax cut (at an annual rate) for the consumer sector, and happened right in time for the most important part of the year for retailers." The problem - the benefit is only felt while the price is declining; once it stabilized it has no incremental boost. So unless crude collapses (recall Saxo Bank's outrageous forecasts - it just might), there is no more exogenous boosting to economic growth. And if inversely gas starts rising again, then that $70 billion tax cut will become a tax hike. Long story short, the "US Economic Decoupling" is ending. Furthermore, even if tax manages to pass the payroll tax extension, it will at best not detract from growth. But it certainly will not add to it. Which is why the market which has so staunchly been ignoring what happens in Q1 2012, may want to reconsider. And with 9 days left in the year, it may want to do it soon... just in time for tax selling purposes.
From Gluskin Sheff's David Rosenberg
How interesting it is to see GDP growth in the US likely come in at its best pace for the year in Q4 at the same time that corporate guidance has been the poorest - Oracle and General Mills were the latest to show signs of revenue sputtering and/or margin compression (hey, but don't all the strategists this cycle are predicated on "global growth" and to ignore US GDP - and now we are supposed to be paying attention to it).
Look, the reason why Q4 is looking pretty is because we have seen gasoline prices tumble from an average of $3.77 a gallon in early August to a 10-month low of $3.29 right now. That is practically equivalent to a $70 billion tax cut (at an annual rate) for the consumer sector, and happened right in time for the most important part of the year for retailers. This windfall provides a 2% boost to discretionary spending just from what people saved at the pumps. But for the momentum to be sustained, we would have to see another 50 cent decline and that is hardly likely going to happen unless China slows down materially and causes a meltdown in the energy complex given how tight the global supply situation is right now (in other words, be careful what you wish for).
For the consumer, the challenge is five-fold going into 2012:
- Relief from lower gas prices comes to an end.
- The lagged impact from the $2.5 trillion contraction in household net worth in the past two quarters shows through in a rising savings rate.
- This rise in the savings rate is compounded through the year by uncertainties surrounding the longevity of the Bush era tax cuts.
- Employment has picked up over the past year but overall, growth is still tepid by standards of the past and the jobs that are being created (retail, leisure, accommodation) are in low-paying areas and as such are not helping provide much of a lift to overall work-based incomes.
- Ongoing fiscal retrenchment at the state and local government level, including something new — reductions in pension benefits.