One glimpse at the following chart and it's clear that the US economy has not reached the much-vaunted "escape velocity." As CNBC's Rick Santelli explains in this succinct summary of the quandary of GDP hopes, inventory-build fears, and extrapolation-dreams, "many of these programs, procedures, and plans offered by the Fed - or the government - actually work to jump-start the economy... but they can't reach sustainability." His simple analogy of the economy as a heart-rate in a chronically sick (if not dead) person and Fed juice as a defibrillator seems very fitting. As the chart below shows, the US economy is very much still on life-support.
"What's the real issue with inventories? The issue is when you build widgets, that figures into GDP - but the real question is, the drawdown of that inventory... How aggressively does it get consumed?
So, if you look at 2013 in its entirety and break it up mid-year, the inventory build at the end of the year was close to 2 1/2 to 3 times as large as the inventory build in the first half of the year.
Why is this important?
Because, first of all, we are seeing all the revisions that I look at for the next addition of our second look at fourth quarter gdp most likely to be under 3%.
[7]
If you recall it was originally 3.2, but maybe more important is the fact that many shops are also downgrading Q1... and it isn't from 4% to 3%, you know, we were all thinking we were going to get the lofty numbers. We're looking at Goldman, for example, at 1.9%. [8]"
Simply put, that is not the kind of "growth" and "consumption" needed to cover the massive inventory build and so once again - thanks to Federal Reserve intervention - managers have been 'fooled' into believing in the future sustainability, have mal-invested, and next comes another stagnation (and the cyclical downturn that we noted here [9]).
(h/t @Not_Jim_Cramer)
As an aside, we note this little tidbit (via Bloomberg):
S&P’s Jan. Drop May Be Recession Signal: Nautilus Capital
There are 19 instances since 1900 where S&P 500 falls in January after two or more years of gains; in 14 of those occurrences, it pre-dated the onset of a U.S. recession, writes Nautilus Capital research team led by Tom Leveroni in note.
Considered a positive signal if a recession commenced within 15 months (using NBER recession dates); avg. onset of recession after signal was 7 months
Positive signals occured in 1910, 1913, 1920, 1923, 1926, 1953, 1957, 1960, 1970, 1973, 1981, 1990, 2001, 2008
False signals occured in 1928, 1956, 1977, 1984, 2005