GDP Revised Up But Future Growth Revised Down UPDATED

This is discouraging news: GDP for Q4 was increased to 5.9% from 5.7% but the sustainable components were revised down. This table from Calculated Risk shows consumption (PCE) and investment dropping while the most transitory part of GDP, inventories, made up the increase:

	Advance	Second Estimate
GDP	5.7%	5.9%
PCE	2.0%	1.7%
Residential Investment	5.7%	5.0%
Structures	-15.4%	-13.9%
Equipment & Software	13.3%	18.2%

Worse, deflation also added to GDP. The nominal GDP stayed the same at 6.3%, but the price deflator was reduced by 0.2%, meaning less inflation, pushing real GDP from 5.7% to 5.9%.

Excluding inventory rebalancing, GDP would have been revised down from 2.2% to 1.9%. 

Let's look forward, starting with inventories. Will inventory rebalancing continue? It has gone back to a "healthy" ratio of 1.25 months, but the actual increase is modest, remaining about 10% below YE2008 levels, and actually declined in December. The good news in this chart is sales (red line) are rising faster than inventories (blue line) giving credence to continued inventory restocking in Q1 and Q2. 

 

Durable goods have been rising, supporting positive manufacturing data, but excluding aircraft ticked down in January. It had been rising for a number of months, and this it should be no surprise that business activity shows a V shaped recovery:

Parsing the durables, however, shows this chart, which says a lot of the growth is due to defense spending, not the private economy:

 

Overall the GDP chart looks like a V shaped recovery, but as The Big Picture reports, "even with the big Q4 GDP, U.S. GDP was down 2.4% in 2009 — the worst showing since 1946 (down 10.9%). [Also] 'In 2009, business investment fell the most since 1942, while imports fell the most since 1946.' "

All in all the data is a mixed bag, as manufacturing still seems on an uptick even as organic growth seems sluggish at best, with declining new and existing home sales for example. I have noted how leading indicators seem to be flattening if not beginning to dip. ECRI still insists that a double dip is out of the question:

“with the 6 percent GDP growth and the jobless rate having peaked back in October… a double dip is still out of the question.”

Hmmm. Unemployment is not looking that promising right now, having just spiked up. What if it rises again after the census temp workers flow through and out? ECRI says their flattening indicators suggest that the recovery "will begin to ease off by mid-2-10." They conclude that it is all but certain now:

 

An even more negative view comes from looking inside the leading indicators. A steepening yield curve is considered a positive indicator, since (as described in my recent Bond Fundamentals post) it normally means that business activity is picking up, and demand for longer-term debt is increasing; yet right now commercial lending is not increasing. Instead, the wide rate spread is an artifact of the Fed keeping the short end artificially low. Without that steep curve, the LEI would have dropped 0.1% last month. 

Mish's take on the leading indicators is the double dip may begin as early as Q2 this year. 

GDP models summarized at Briefing.com are begin to show a drop in projected Q1 GDP to 1% growth, albeit based on increased inflation not decreased business activity:

Comments

[Roger D.]

Between Iceland and the U.S. Housing market who needs Greece.

Everybody's bullish as it sounds like Tony C has thrown in the towel. I say perfect as the Dow completed a expanding triangle at the end and we are now in wave 3.

Roger

http://www.screencast.com/users/fast996/folders/Default/media/344520d6-027c-4299-a1df-ee7484a06a7e

[Chabazite]

Roger D. Yes it is quite extraordinary how Tony C has changed his tone. Basically ever since he did that long range analysis on 14th Feb he appears to have be more weight in the bull camp than the bear camp, and his tone changed very quickly. However he has had many years of experience so he must see something here that I don't.

[Roger D.]

Maybe somebody with a lot more experience with fractals can comment on this chart. The large one off the initial top isn't as clear as the others. But these show up in many degrees and if these are partnered,I would find that quite amazing.

Roger

http://www.screencast.com/users/fast996/folders/Default/media/95769ef7-4cd2-449e-8069-154440e9e7e4

[Webber]

The dominant axis for the last 4 months is the long-term declining trendline. Crossed 1120 the 3rd week of December and $SPX broke out for 3 weeks, setting the top on Jan 19. Minor wave 1 broke back below, retesting the line on Feb 2 and immediately falling 60 pts in 5 of 1. Minor wave 2 crossed back above on 2/17 on its way to a 64% retracement high a week ago. Since them wave 5 of minute wave 1 fell below again with wave 2 bounced and hit an 80% retracement today before falling at the close.
We are as tight in the wedge as possible, with the trendline at 1090, and in the apex of minor wave 1 top and bottom trendlines (converging at 1100 next week). Price is sitting on the 34 day sma, the 20 day sma is 1088 and the 144 day sma is 1075. MACD is narrowing and RSI is above neutral.
The long-term downtrend started bending the Hope rally in Nov and now is exerting strong influence, as price action has wobbled back and forth over the line the last 10 weeks. Wave 3 of Minor wave 3 is the next likely move and should clip 100 pts next week.

[Roger D.]

Also after I've studied the wave structure (really),I have changed this to my primary count. Not that it matters at this point,but there are similarties with the large impulse waves down. The many things that stand out is the fractals, 5 pt reversals,and as I said the large impulses down. They look to be a's with a connecting small b and then c's down. Maybe I'm just seeing things.

Roger

http://www.screencast.com/users/fast996/folders/Default/media/ebd949bc-e471-4da7-995c-458c026e776f

[EN]

I say a retest of the 1030-1040 area and then up to new yearly highs and then some.

[Chris]

I'm long with a move above the 50 day MA. If the market turns down, short the SPX below 1075.

[da bear]

What if they held a Hyperinflation and no money showed up?

da bear

You've got questions? So do I!

[DG]

Roger,

Just out of curiosity, how long have you been doing wave counts? Your counts have almost no discernible logic to them.

You have wave-a of 2 lasting almost 20 calendar days and then waves b through e lasting, what, 2 or 3?

You seem to force every count to lead to the conclusion that wave 3 down will start the next trading session. That's a very treacherous and potentially expensive way to do wave counts. If you really wanted to trade that wave count, you could, so long as you had a stop at the "wave 2" high, I suppose, but I certainly don't think that's anywhere near the right count and I say that not being completely sure what the right count is at the moment.

At best, the market is showing two specific signs of weakness:

1. For the amount of time elapsed from the price low, this rally is weaker than any since the March 2009 low, which MAY mean that it is not going to make a new high, but is simply a retrace of an initial move down to resume the bear market OR is the final leg up of the March 2009 rally and will end at a lower high.

2. The rally is now equal to the decline in time, but has not fully retraced it in price, indicating that the forces pushing the market down are stronger than the forces pushing it up.

I think any specific claims beyond those two are premature.

[usdollar]

I think what we see is an elongated flat wave B forming on a huge triangle wave X spx, djia. I believe djia will hit 10800 ish before wave C down will start on wave B of triangle wave X. ai believe what we are looking at now is wave b up forming. The dollar will come up to about 95ish, forming wave 4 of 5 in an ending diagonal from the 80s. Wave 5 of 5 down (usd)will most likely also end in an ending diagonal down to around 65 or so before exploding to the upside, tripling or quadrupling in price around 2011. Destruction of credit will make cash king. 2years away is my guess, maybe a little less. It is unlikely for the dollar to spike without having big banks failing.

[DG]

I say a retest of the 1030-1040 area and then up to new yearly highs and then some.

Posted by: EN | Friday, February 26, 2010 at 04:33 PM

I have been saying for two weeks that neither the bulls nor the bears have a fully convincing argument at this juncture. Of my last twenty trades over the past five+ weeks, 11 have been short and 9 have been long. There's just no trend.

If you run a linear regression on an Hourly chart since January 21, which is when I think the pattern to the upside actually ended, the R-squared of the regression is 0.0039, which is basically the definition of "trendless". It's impossible to say if that fact favors the bulls or the bears going forward.

[Roger D.]

Hello DG,

Please post your chart so I may learn like you have.

Thanks,

Roger

[DG]

Here you go. Here are some short and long term options for what's going on.

http://img717.imageshack.us/g/spyhourly.png/

[Roger D.]

DG

Subjective isn't it. there isn't any difference at all.

Roger

[DG]

Roger,

No, here is how our counts differ:

1. You're calling the move down an Impulse and I'm saying it's Corrective.

2. You've got Expanding Triangles in places I'd never put them and you've got the patterns which follow those Expanding Triangles acting in ways I'd never have a pattern following an Expanding Triangle act, i.e. retracing all of wave-E faster than wave-E's formation.

3. The sizes of your individual segments of patterns doesn't adhere to the Rule of Similarity and Balance, i.e. each segment needs to be at least 30% of the segment adjacent to it in either time, price or, preferably, both.

4. You don't require that each subdivision (1,2,3,4 and 5) of an Impulse wave be at least as long in time as the one preceding it.

5. Your Fib relationships between waves 1, 3 and 5 in your Impulses are not in accordance with the most likely ratios, i.e. if wave 1 is larger than 5, 5 should be .618X or .382X wave 1, or vice versa if 5 is larger than 1.

6. The "extended" wave in your Impulse does not have the appropriate minimum Fib relationship to the next largest wave in your Impulse. The largest wave should be at least 1.618X the next largest.

7. Most importantly, I haven't committed myself to a wave-3 down which, in all likelihood, won't happen. I do like the bear side of the equation here, but not a wave-3.

All of those rules and decision-trees are built into my count.

The point is to get away from subjective wave counts and toward more objective wave counts.

[DG]

Wait, you actually did adhere to number 5, since your wave 1 is ~38.2% of your wave 5.

[DG]

Mish's take on the leading indicators is the double dip may begin as early as Q2 this year.

I really liked Mish's comparison of the two "leading indicator" methods (LEI vs. WCI).

[Hank Wernicki]

Fractals are clearer when displayed as lines and not candles

I can say this: the ESH10 is showing a remarkable similarity thus far.

"This week will tell the tale" of whether the decline will continue or everyone covers !

And all stops are wiped out for a test of the highs again ....

Neutral here to bullish