Last year we exposed the reasoning for the extremely predictable cyclicality in US macro-economic surprise data [6]. Each year of the last few, the third quarter has exhibited unusual "strength" surprising 'economists' - thanks to government agencies executing their final budgets to use up all their allotments - only to stabilize in Q4 and the fade rapidly in Q1. 2013 was "different" as we had the government shutdown which threw the seasonal pattern off... but once the agencies were re-opened, the spice did flow and we got what is now clearly not a sustainable 'surprise' in growth but a lagged cyclical bounce. However, the lag introduced by the shutdown is now catching up to us - so it is different this time (2mo. lag) but the same...
Step-by-step...Why the "Q4 recovery is sustainable" meme is crap...
1. Each of the last few years (as we note below) there is a 'surprise' in Q3 macro-economic data... which then fades rapidly in Q4 and on...
2. As we noted last year, there is a clear reason for the annual Q3 economic bounce - Fed agencies spending surges to ensure they meet their year-end budget spending goals - and get next year's budget :
As the ISM reported - "The federal government's spending is increasing greatly as agencies execute their final budgets and utilize fiscal year 2013 appropriated funds prior to their expiration on September 30th. This has caused a major increase in procurement activity for goods and services. Budgets are uncertain for fiscal year 2014, so some items requiring funding in future years are not being purchased." (Public Administration)
Which got us thinking: September 2013 saw a big bounce in various economic indicators leading many to speculate that this was yet another indication that the "sustainable recovery" has finally arrived. Of course, it was not just this year but also last year, and in prior years, that there has been a very distinct pick up in the late Summer economic indicators, only to promptly fade away into the fall and winter.This can be seen on the chart below.
[7]
[8]
This begs the question: is the only reason why the economy tends to pick up momentum dramatically as the summer ends just a function of a surge in government spending permeating the broader economy as agencies scramble to spend all the money they have before the end of the September 30 Fiscal Year End (just so they get allocated the same or greater budget in the coming fiscal year), which subsequently plunges or is outright halted as the case may be right now?
If so, it would explain so much, and certainly why year after year, the US economy seems to pick up in the mid-to-late Q3 period, only to dramatically fade away in the coming months, as government spending goes from a waterfall to a trickle.
It would also put the government's role in generating transitory periodic spikes in economic output under a microscope, especially since it is so clearly staggered to recur every September as one after another government agency spends like a drunken sailor. And if that is the case, how long until the BLS or some other agency (upon reopening of course) is taken to task to normalize not only for hedonic indicators and climate-related seasonal factors, but also for what is now clearly an annual aberration of economic output trends?
3. Well the government shutdown screwed with this cycle last year. The following chart shows the drop in macro data as the shutdown occurred (red oval) and then once the agencies re-opened en masse, their spending surge "surprised" and we got a major "positive surprise" in macro data (green oval)...
[9]
4. Now we are back to the normal cycle - and a fading macro backdrop (red arrow)
So, it is different this time... it's a month or two lagged from being exactly the same and the hopes and prayers of the Q4 "sustainable" recovery and the weather blame for recent weak data is merely the lag from the government shutdown washing through the system once again...
So the bottom line is - the US "recovery" remains as entirely unsustainable as during any previous year and the hope of Q4 is now fading into the cyclical normality of a government agency spend that piled up in Q4 and is now done...