Everyone knows the world's foremost Wall Street meteorologist, and sometime Deutsche Bank economist, Joe LaVorgna.
For those who are unfamiliar, Joe is the person who in 2014 blamed every. single. negative. data point [5]on the weather.
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Joe is also the economist who famously lost a forecasting face-off with Groundhog Phil [7].
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But most notably, Joe is Wall Street's biggest permabull.
Or was.
Because when we read that said LaVorgna was slashing his Q4 GDP forecast from 1.5% to 0.5% and warning that "this still might be too high in light of what could be much larger inventory liquidation than what we have assumed" (an inventory liquidation this website has warned about since last summer [9]), we had to do a double take: no weather excuses, no pleadings for more QE or NIRP, no pulling the "decoupling" card, no seasonal this or that, just the facts. Surely something either truly horrible is coming if even Wall Street's biggest permabulls are throwing in the towel. That... or the depression is about to end.
From Deutsche Bank's Joe Lavorgna:
We have reduced our estimate of Q4 real GDP growth by one full percentage point to 0.5%, and this still might be too high in light of what could be much larger inventory liquidation than what we have assumed. We discuss this in more detail below.
The downward adjustment to Q4 2015 has the effect of lowering our projected Q4-over-Q4 rate of real GDP growth by 30 basis points (bps) to 1.7%. Some of the expected Q4 GDP softness may carry over into the current quarter. Therefore we have trimmed our current-quarter growth projection by 50 bps to 1.5%. The 2016 forecast changes end here, as we are keeping our estimates intact for Q2, Q3 and Q4 growth at 2.2%, 2.1% and 2.4%, respectively. If we are wrong, growth is likely to be weaker. Why are we making these changes?
Data released over the last couple of weeks (i.e., durable goods orders, advance international trade, construction spending and the manufacturing ISM) have been softer than expected. Most of this adjustment is due to less stockpiling. As we can see in the chart below, there is a high correlation between the change in private inventories and the inventory component of the manufacturing ISM—it is nearly 0.8. Last quarter, ISM inventories fell to a reading of 44.3 from 48.8, the lowest level since Q4 2009, when inventory liquidation totaled nearly -$50 billion. Thus, inventories could be lower than what we have predicted, possibly taking GDP temporarily into negative territory. We have decided to be a bit more conservative by assuming there is some residual inventory liquidation to occur this quarter. If it turns out that Q4 2015 stockpiles are even lower, then this could boost Q1 2016 real GDP at the margin. Still, the Q3 momentum of domestic demand appears to have stalled last quarter, and tighter financial conditions could weigh on spending this quarter. Hence, we believe it is prudent to make a modest downward adjustment to our Q1 2016 GDP forecast. We hope our changes stop here. Whether they do will depend in large part on the price action in the financial markets. In particular, growth prospects for this year will depend on whether the stock and credit markets can find footing and the appreciation of the dollar can abate. In the short term, the labor market are likely to remain constructive, which means Fed commentary on the economy should continue to sound relatively upbeat as policymakers gear up for another 25-bp rate hike this quarter. Stay tuned.
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Surely something wicked this way comes if even the most stalwart bulls are starting to mutate into white, cuddly bears.
