GDP Bends the V-Shaped Recovery Curve

 GDP in Q1 at 3.2% was below consensus (3.4%) and well below Q4 (5.6%), putting the V-Shaped Recovery at risk. As CalculatedRisk observes: "for a 'V-Shaped' recovery, GDP would already be close to previous highs." 

Still, the back-to-back growth of Q4 and Q1 are the best since coming out of the last recession in 2003. Question is what it portends for the rest of the year. James Picerno worries about a slowdown business spending and a slowing of exports. So it all falls on the backs of the American consumer. A concise summary:

These numbers are entirely dependent on an increase in consumer spending. Everything else is becoming a drag on growth.

Quick snips (all rates are annualized):

• PCE or personal expenditures added 2.5% to GDP (almost all of it!), worse than expected (4%) 
• Government spending shaved 0.4% off, meaning going forward will drag down GDP
• RI or Residential Investment fell 10.9% vs a rise of 3.8% in Q4
• Inventory added 1.6%, down from 3.8%, and should not help going forward

PCE increased 3.6%, up from 1.6% in Q4, which is promising, except it was driven by a decline in savings and transfer payments, which is not sustainable. Disposable income only rose 1.5%. 

Government spending increased at the Federal level by 1.4% but decreased at the State level. State spending drops offset Federal stimulus, and that offset should increase over the rest of the year, particular in the big "Blue" states with huge budget disasters. 

RI is a big concern. No recovery sustains without an increase in new home sales. RI was only up in Q4 due to a Cash4GDP program, which was restarted in March, so I expect this to reverse to positive in Q2, then fall in Q3 as the program ends again.

The one bright spot was technology investment by business skyrocketing at 13.4% growth. Perhaps "skyrocketing" is hyperbole, since this rise was less than the 19% of Q4.

Inventory rebalancing has driven the recovery so far, but is getting back in balance. In the whacky world of GDP, inventories fell in Q4, but added to GDP, since it had fallen less than the prior quarter. Inventories rose in Q1, but added less to GDP. 

Predicting GDP with inventory in balance comes from using "Final Sales", GDP less inventories, which rose less in Q1 (1.6%) than it had in Q4 (1.7%). If government spending is also removed, it shows final sales of private goods/services at 2% in Q1 and 1.9% in Q4. The private economy seems to have come back and is stabilized at a relatively low level of growth. 

Since disposable income is flat, the somewhat higher consumer spending cannot grow the economy absent a big change in employment. Higher growth will depend upon investment, plus a continuation of growth in Asia since the rest of the world is in the same funk as the US. 

Investment as measured by capital expenditures overall rose but at a declining rate from Q4. I think this is an artifact of Cash4GDP programs going in and out. I would expect CapEx to grow more in Q2, partly driven by continued tech spending plus the gimmicky residential investment, then flatten or fall through the balance of the year. (The WSJ reports that the gimmicky homebuyers credit is not driving a frenzy of buying, so RI may disappoint.) Here is the current trendline:

 

Karl Denninger has his usual rant with a point: The US borrowed $462B over tax receipts in Q1, but only $87B showed up in GDP, mostly in PCE from transfer payments - where did the other $375B go?

That is 10% of GDP, meaning a huge amount of stimulus fell down a rabbit hole while the little that spilled over kept the economy on life support. Karl supplies this chart to make this point vivid. Compare the red line (GDP) with the blue line (deficits) to see how many gobs of debt are being thrown down the rabbit hole for a modicum of life support:

 

The death of the V does not yet mean a W double-dip. Instead the debate will be over 3-3.5% going forward vs 1.5-2%. From CreditWritedowns: 

Bottom line: the government is removing the stimulus prop to GDP growth before the recovery has become self-sustaining. The inventory cycle is already starting to fade. That means weak 1 or 2% growth at best by Q4 2010. Unless job growth picks up tremendously by the second half of the year, this recovery is in trouble.

Comments

[Kong]

THIS MARKET IS GOING TO TANK WITHIN THE WEEK
QUOTE ME ON THAT ............. GO SHORT

Hank

Hank, do you see a new high in the S&P first?

[nspolar]

DG, since you are short from below you may have a nice day.

I am glad for you!

A statistic on this blog that is very obvious to all I would think is that when you get in a bind post wise, you automatically revert to the name calling, swearing, telling folk to shove it up their ass, and all the rest, the FACT is .... and on and on.

And you think my posts are a chuckle?

Then you have the gaul to ask a person what is their problem?

Statistically my read is the probability is quite high you have been a casualty of this economy. How recent I am not sure. You likely had a little nest egg, thought you are very intelligent, and were/are going to make a living day trading. You are going to beat the monster.

And you are having trouble right? Following Neely got you into BIGGER TROUBLE.

You should realize there are very very few that can do what you are attempting.

Your statistics you come up with are quite interesting as well. You gave someone a bunch of statistics about going long here or stopping out on a short or something, yet the TA parameters on the indices have been pegged for days and days. Isn't then there some statistic and probability that would say a change is due? Hard to understand, but at some point after a person gets walloped, confusion takes over.

You would likely do much better if you backed way off, got a part time job, and only spent a few hours a day at this. Again money will not make you happy. It can make you more comfortable, but it is not the source of true happiness.

And don't follow anyone DG, never do that.

I'm a psychologist DG. I know these things.

Now back to my Atlas Copco ZR4-67. A bull gear failure due to high cycle fatigue on the bolts that held it in place. A design issue. DG should I use ASTM A193M Gr 7 bolts or Iso 10.9, plain finish, or zinc plated or what? What about Loctite 609, will it do the job, and allow the bolts to go along for the ride? What you think DG?

Later Matey.

ns

[Michael]

GDP estimates were all over the map, with Goldman at the low end of 2.5%, Morgan Stanley at 3.5%, and UBS at 4.0%

[Eventhorizon]

It would be nice if the Keynesians would notice the inverse relationship betwen deficit spending and GDP growth evident in that final chart!

[DG]

A statistic on this blog that is very obvious to all I would think is that when you get in a bind post wise, you automatically revert to the name calling, swearing, telling folk to shove it up their ass, and all the rest, the FACT is .... and on and on.

What "bind" was I in? I was reacting to your statement about "taking it up the ass". Immature? Probably. A sign of being in a "bind"? Hardly.

And you are having trouble right? Following Neely got you into BIGGER TROUBLE.

Yeah, again, Neely's down about 10% for the past year and I've made more than that from my own methods since January. Unless you consider opportunity costs of missing out on the rally, which are real but a secondary consideration, can you please explain to me how even losing 10% is "big trouble"? Again, don't wander off into whatever speculation you want to make, stick to the FACTS. It isn't really that hard. For example, I know for a FACT that you're short from lower levels. I have no idea if this trade is causing you financial pain or isn't. Nor do I care. Why? Because I have no FACTS upon which to base an opinion one way or another. Nor do you. So, any speculation I make about your short trade is just that, speculation, and I don't deal in speculation. I'm actually embarrassed for you, seeing how you make claims without any evidence. I hope you don't do that sort of sh!t with your boss. He'd probably be sitting there thinking to himself "WTF is this guy basing this on?" So, let's just stick to what's known and save the speculations for the college kids doing bong hits, OK?

I'm a psychologist DG. I know these things.

Yeah, OK. I thought you were some kind of engineer. You want to know where I got my trading capital? From telling guys like you what products to make and who to sell them to. I was a "corporate suit".

Look, the point of the first post is that you're deluded if you think you're the only one short. Beyond that, unless you really up your game, I'm not finding anything you say of interest at this point because it's all just mental masturbation on your part, trying to "psychoanalyze" me. Just stick to what I actually say and you'll do a much better job of understanding where I'm coming from.

[Account Deleted]

Respected DG !!

I have posted the daily chart on the followinng link.Please have a look at it

http://yfrog.com/b6jpt2p

Here is one more incase u require it.

http://yfrog.com/9hjpt3j

DO take a look at them if time permits and guide me with your wave count.

Regards
VB

[DG]

VB,

On the first chart, not knowing what went on during the time before the chart, I'm only comfortable saying that from the price high it looks like a potential Neutral Triangle formed. If that's true, new highs should occur.

It looks like the second chart is just the same one from yesterday with more time added to the end, right? So, the B-wave is probably still going.

[yelnick]

Michael, the stinker in the GDP report was PCE, which came in lower (2.5%) than consensus (4%). Govt is a negative and will continue as such indefinitely as the Peak Stimulus abates. My favorite stat is final product, which is GDP less inventory, was 1.6% down from 1.7%. Combined with a WSJ report that the homebuyers credit is NOT causing a feeding frenzy suggests Q2 will come in around 1.5% since Inventory is now back in balance.

[Michael]

Big Beta Commodity stocks continue to get hit. CLF, MEE, FCX, JOYG, X, RIG, DO, etc., but many of the above are reacting to the "sell the earnings" phenomena, or "special" adverse situations as in the case of MEE and RIG.

[Michael]

Yelnick,

I guess there is something for EVERYONE in this GDP report. I'm not really surprised by the numbers... it all looks to be "in-line".

The big inventory replenishment of Q4 has now given way to consumer and business spending. Nothing unusual about that at this point in the cycle, right?

[Hank Wernicki]

How many times has the market reacted opposite to what the GDP should offer in terms of direction

I don't think it really matters ...

[Account Deleted]

DG !!

I have added one more chart.This is the period just before the Rise took place from bottom.U can say the entire chart from start.Incase this gives u some insight.

http://yfrog.com/0ujptbeforej

Regards
VB

[yelnick]

Michael, the GDP report is actually disappointing. It shows core growth around 1.5%, and combined with little top line growth in the recent earnings reports, presents investors with a read on the future: earnings have gone up due to cost cutting, but won't grow much, hence market should now stall at least into August/Sept when we get a better read on 2011.

[Account Deleted]

DG !!

All these charts are of the same stock.Its just tht I cannot have entire chart in one picture.I have posted chart in Pieces of different time frames.Incase if its possible if u could just take a consolidated view based on these different pictures.

Also in your previous message u have mentioned about a NEUTRAL TRIANGLE formed.Can u please mention as to from where u r considering NEUTRAL TRIANGLE.The First high or the second high.

Regards
VB

[Mr. Panic]

Yelnick,
There are rumors that the UK is going to blow up after the elections on May 6. I have seen some cyclists mention this date. There was the LEAP report posted over at EvilSpec a few days ago and today the Wall Street Journal has a prominent article: Warning Signal on UK Debt? Purchases of Default Protection Have Doubled in 2010, Outpacing Spain,Italy.....

WSJ journal has been providing some interesting coverage of the UK election including Brown's major gaffe on the campaign trail as well as the likelihood that there could be a hung election as the Conservatives aren't taking advantage of Labor's weak position.

[DG]

VB,

The Neutral Triangle was from the high around 130.

It's tough to say what's going on. I think that since the stock goes from being essentially a penny-stock under 5 to over 300 (not sure of the currency), you need to put it into log scale. I would assume that the rise from 5 to over 300 was an Impulse, but since then I cannot really piece everything together. As I said, from the 300+ high, it looks like an Impulse down followed by a wave-B or wave-2, probably a B. I would expect another leg down (although, again, you'd want to look at price projections for that leg down in percentage terms because clearly it won't go below 0, which would be the projection on an arithmetic basis.)

If you can put it all into a single Monthly or even Yearly chart, I will take another look, but without being familiar with the stock, I just can't say much more.

[Mr. Panic]

$FTSE and $CAC were breaking down as the US market was making new highs and now they are going nearly vertical with both closing near new lows for the move.

JNK, (junk bond ETF) is mimicking the pattern at the January stock market top and according to WSJ money has been flooding into emerging market debt during the past month so we've got the signs of speculative froth seen at important inflection points.

Of course, the SP and Dow returned to the start of the waterfall decline in Sept 2008 when the Lehman Bros. calamity struck last week. (also .618 retracement of 2007-2009 decline) That is about a strong of a resistance that can exist since its almost a natural law that those who bought above this level will not be bailed out by the stock market. (although it went higher than I though it would----Carl Futia does make a compelling case in his perma-bear post of Jan 2009 that the Dow could get up to 11800 based on his interpretation of George Lindsay's 3 peaks and dome house pattern.)

There is a chance the US averages could still make new highs flying solo as contagion hits Europe and emerging markets ove the next few weeks and rally into July when the next solar eclipse occurs and P2=P1 (for a lack of better terminology....1998 might be a fitting blueprint). (Bradley model will also hit its top 5 lowest level of the past 130 around this time.....all hit during times of substantial economic dislocation)

[yelnick]

Mr Panic - I expect the Liberal Democrats to surprise, based on a general fervor to throw out the incumbents, whomever they are. I don't think the UK situation blows up that quickly, however. If history repeats, Greece gets rescued and the rescue goes awry as banks try to run for the exits. This then panics the rest of creditors to the PIIGS and causes a more general run away from sovereign risk. The UK would likely get in trouble by first joining the rescue brigade and later (Sep?) finding itself in PIIGS Poo.

[Account Deleted]

Respected DG !!

I have posted two more pictures of the same stock on LOG SCALE.Please have a look at them whenever u have time.

http://yfrog.com/3mjptsecur1jx

Thanx a lot
Regards
VB

[Account Deleted]

DG !!

Here is one more entire chart on MONTHLY LOG SCALE

http://yfrog.com/emjptmonthlyj

Thanx a lot
Regards
VB