Rosie Highlights The Biggest Problem With Last Week's GDP Miss

Last week's GDP miss is now long-forgotten, as not only that but the Egyptian revolution has been priced into daily POMO and $195 billion worth of incremental liquidity from the SFP program unwind.Today, David Rosenberg ignores all the noise comprising the number which lately is almost as credible as the goal-seeked data coming out of China (not to mention seasonally and weather adjusted) and instead looks at the big picture, namely how much debt is required to purchase not only the actual incremental growth, but a trendline 7.3% quarterly annualized GDP growth in a normal recovery. The math works out as follows: the US Economy should be adding $42 billion a month. It is at roughly half of this. But in the meantime, it is also adding $125 billion of debt per month (and soon much more). In other words, the US economy now takes $6 of debt to generate $1 of GDP growth (and would require $3 if it was growin in a normal fashion).


The temptation, of course, is to look at the huge growth rate in final sales and the drop-off in the inventory line as a reason to boost first-quarter GDP estimates. Here’s why it may be important to resist that temptation:

First, Q3 saw a massive boost to GDP on the inventory line, so the Q4 reversal has to be seen in that light — it is quite possibly that Chinese firms rushed to catch the export rebates that ended in June. So, an alternative take on Q4 that has been put in front of us is that part of the ‘surge’ in retail spending was due to retailers realising they had over-ordered last winter/spring, when everyone thought the economy was on a V-shaped recovery, and thus ended up slashing prices to get rid of the excess (which also helps explain the lack of any growth in the price deflators). This would also explain why there hasn’t been much follow-through since Thanksgiving, which was clearly their best chance to rebalance their stockpiles.

Second, the question must be addressed as to how the GDP deflator slowed from 2.03% annualized in Q3 to 0.26% in Q4. Indeed, the key point here is that nominal GDP was up only at a 3.4% annual rate. What is normal for the sixth quarter of post-recession recovery historically? Try 7.3%. As a loyal reader pointed out to us, this comes to $42 billion per month when we are adding federal debt at a monthly rate of $125 billion. How long can this arithmetic of federal debt rising at triple the pace of nominal income growth remains stable is truly anyone’s guess.

We challenge the optimists to explain how this is sustainable.