Our Hollow GDP

"Weak Hiring Casts a Cloud" -  WSJ
"For Jobs, Signs of Recovery" - USAToday

Is the recovery finally on? Or is it all an illusion, where the increase in spending is due to transfer payments from big deficits? Let's explore the reality and the illusion. 

A lot of pundits have caught the optimism. Consider these factoids:

• Holiday retail sales highest in years
  • but it turns out it wasn't - it was a dud
• Q3 GDP revised up
• Q4 GDP on track for even higher
• GDP in 2011 revised upwards due to Tax Deal
• Latest ISM report up showing increased business activity
• Job openings rebounding (see chart)
• Commercial lending *may* be picking up

The best green shoot of them all is the WSJ story that bank lending may finally be picking up. Commercial lending to finance growth is the real key to a recovery. Yet if there is an uptick, it is barely discernable (see second chart).

The other big positive news is the Tax Deal, which puts off the dreaded double-dip by not hammering the economy with a massive tax increase.

Yet at the same time the recoveryless recovery faces severe headwinds:

• Housing - double-dipping
• Jobs - growing too slow 
• Oil - rising to dangerous levels
• Debt - used for transfer payments, not growth

Make no mistake, there are signs of improvement, and they have been trending better for the past four months - ever since QE2 was announced in late August. We saw a similar burst of optimism last year at this time. Is it real this time, or another illusion, driven by massive transfer payments, which boost GDP but not the real economy, and pile on more debt for transient spending?

Let's walk through all four headwinds.

1.  Housing

No major recovery has occurred without housing, and housing is double-dipping. Housing prices are down and the rate of change has gone negative (chart courtesy PragCap). Unlike last year, no one expects another gimmick like the homebuyers tax credit, and despite QE2, mortgage rates are rising. 

Worse, housing prices remain above the long-term trendline (chart courtesy WSJ). Both Peter Schiff and Gary Shilling think they need to fall at least another 20%:

The silver lining in housing has to do with the possible resets of optionARMS. CSFB published the following chart and scared everyone that a new wave of defaults was ahead. Rather, give credit to The Ben Bernank and QE1, which kept mortgage rates low and gave the banks time to work down some of their future default headaches. As a consequence, CalculatedRisk estimates that the big default wave will be smaller. 

2.  Employment

Friday's unemployment news is ambiguous: WSJ thinks it casts doubt on the recovery, USAToday think it shows hiring will pick up in 2011. The actual new jobs at 103K is too low to keep up with the growth of the workforce (150K-200K), as discussed below, but the underlying question is the trend. John Mauldin is encouraged by the last four months, which trend towards job growth:

The key is to watch the direction of the monthly revisions. [I]t is now four months of upward revisions. That is a positive. We need that to continue.

The negative is that it will be years before we get back to a 5% unemployment rate. We will need 5-6 years of 2.5 – 3 million jobs a year to get there. We have never done even two years in a row like that. Unemployment is still going to be a headwind for some time to come, and that is likely to keep a lid on incomes, which is not good for final sales.

The red flag is that while jobs grew slower than new entrants to the workforce, the unemployment rate dropped from 9.8% to 9.4%. Normally at the start of a jobs recovery the opposite occurs: the unemployment rate goes up as more job hunters start looking than get jobs. The rate then turns down as job hiring catches up and outpaces job seeking. The opposite is happening. 

The unemployment rate dropped due to a statistical mirage: the 99ers (former workers who have passed 99 weeks of unemployment payments) are no longer getting compensated, and hence disappear from the count of workers seeking employment. The great wave of initial layoffs is more than 99 weeks ago, and each month a large slug of 99ers drop off the stats. Last month the BLS reports 103K new jobs and 260K workers dropping out. 

At best you can say the report was mixed, yet it has been generally met with optimism. 

2010 started with similar optimism to now, and as David Loenhardt explains in the NYT, in the rearview, last year fizzled (the article comes with great graphics). The key problem is employment: jobs are growing too slowly to make up for new entrants into the workforce, and it will take years to get back to where we were. We briefly grew fast enough, but that was due to census and other temp jobs, and that has already faded. The upcoming employment report is supposed to show 150K new jobs, but that remains barely above the 125-150k needed just to absorb new entrants to the workforce, and well below the 200K+ levels to get back to full employment. 

We still remain in the slowest jobs recovery of any recession since 1948. 

3.  Oil and the Commodities Bubble Echo

Oil is heading above $100 it appears, and if this commodities bubble echo continues to crest, it puts US business into an awful margin squeeze: inputs higher, prices flat. Already the positive ISM reports may be more due to a bit of inflation than an increase in unit volume, and the margins squeeze is showing up in statistics, with less profitability for sales volume.

Oil is the killer, and if it continues to rise, it increases many factors of production across the economy, as well as draining discretionary spending from consumers. Funny to me - and ZeroHedge - how Keynesian cheerleaders tend to deny this - they hunger for a big carbon tax anyway - and so do the powers-that-be like the IMF, but it is clear that oil price rises can crush an incipient recovery. With only one exception - 1986, driven by a concerted effort to drop the Dollar in half, which drove oil up - every oil spike of 80%+ has been followed by a recession. We are back in the double-dip danger zone due to oil:

When oil went to $147/bbl, fundamentalists touted Peak Oil and other rationales for a commodities bubble. Oil burst of course, and fell below $32 before rebounding. Very few pundits argue for fundamental drivers of $100 oil today; instead it has become widely recognized that this commodities bubble is being fueled by The Ben Bernank and QE2. ZH has gone further and found a correlation between Dollar weakness and Oil strength that reflects the speculative fervor from cheap money:

The Dollar, however, has been strengthening recently, and its technical structure suggests much more strength to come. In a simple way, with fiat currencies, they all fall as governments tend towards inflation; but the relative strength of a currency comes from others falling faster. In addition, China is in some difficulty, and at some time this year it is expected that a "gray swan" event will shake global markets. It was a change in China's policy towards its currency that popped the commodities bubble in July 2008; it might be a further tightening to stem the raging internal inflation could also pop this commodities bubble. 

Until then, rising oil prices will dampen US growth. See the next chart from FT, which shows how high oil prices adds a "gas tax" across an economy. $90 oil in 2011 would cost the US 1% lower GDP:

 

4.  A Hollow GDP From Transfer Payments

Fascinating and disturbing analysis by John Loundsbury. Looking at official Bureau of Economic Analyses (BEA) data, he finds that transfer payments are $250B per year above the prior trendline, given all the tax credits and other stopgap programs of Obama (and Bush before him, the blip in mid-2008): 

When you then normalize GDP by taking out these tranfer payments, a different picture emerges:

The net effect is the massive transfer stimulus softened the Great Recession, but at a price of an increase in debt commensurate with the transfers. It is not clear that this transfer of wealth provided any foundation for growth. Except for the indiscernible increase in commercial lending noted above, we have not seen the markers of a sustainable recovery.

The economy is not in recovery - it is on life-support.

Take a look at the final chart, designed to show lending is bottoming, and draw your own conclusion.

Comments

[Wave Rust]

yel,

you out-graphed my ability to compute, comprehend and apply the graphical GDP doom predictions.

all i can say is, a hollow gdp is better than no gdp at all ,,,, or, my favorite oxymoron, "negative gdp growth" for 2011.

all this 'bad news' can only mean one thing if everybody believes "the doom GDP growth formula" ,,,, just one thing ,,,, yeah, we all know what that is ,,,, what does a cow say when she wants to be milked?

wave rust

so, what were your really cool gizmo "likes" at CES?

[yelnick]

wave, one can simplify the GDP charts into: it all came from transfer payments, not reality.

CES this year was remarkably incremental. It seems a new conference is needed in the Spring, when a lot of the promise will be ready to be shown: iPad2, Android3, etc. This Jan event is a bit early - the ramp to next year's holiday sales gets serious in the Spring.

Watch a few items: Ford Focus, Motorola Xoom, iPad2 and this summer the iPhone5

3DTV feels dead already. Smart TV is more annoying than exciting (who wants a complex TV you have to boot up?).

Biggest eye opener were the crowds - they have returned. And a huge influx of Chinese. Interesting to me is that the Chinese invasion this year has a much higher percent of female execs than the Japanese ever did back in their heyday, the '80s. Says something about Chinese culture - the Chinese are NOT to be confused with the Japanese.

[Mamma Boom Boom]

------------HOUSING-------------

What are houses really worth? What would they trade at if everyone had to pay cash? We know that a house is a depreciating asset that will be worth nothing someday. Is it possible we haven't see the biggest part of the decline, yet?

The crash is yet to come!

Neo-Mamma

[trendlines]

Asia: Some Bullish Breakouts!

Hello folks! Here are some recent bullish breakouts in Asia, you may find profitable, if played well.

1. South East Asia - Since my last update around the all-time highs, a nice breakout - as suggested!
2. Malaysia KLSE - First time covering this index. Also a nice breakout above 2007 highs.
3. Korea KOSPI - Overtaking its maternal twin, the SENSEX, KOSPI has looked increasingly bullish and maybe about to break its 2007 highs. What Korean conflict??? Shows exactly why markets are hardly driven by news.

Strategy

As all the markets above are in overbought territory, my strategy will be to stay long these markets, and add upon corrections, with a stop loss just below the breakout levels. Charts available on blog :)

http://trendlines618.blogspot.com/2011/01/asia-some-bullish-breakouts.html

[Mamma Boom Boom]

Some people are smarter than others.

http://www.youtube.com/watch?v=cvc_7Fb5T5M

[Mamma Boom Boom]

Can you say "Deflation'?

--Gingrich seeks bill allowing state bankruptcy to avert bailouts--

Former House Speaker and possible GOP presidential contender Newt Gingrich is pushing for federal legislation giving financially strapped states the right to file for bankruptcy and renege on pension and other benefit promises made to state employees.

Proponents of the measure — which include Americans for Tax Reform, a Washington lobby group that fights tax increases — said the legislation is desperately needed to clear the way for struggling states to slash costs before they go belly up, and should be regarded as a preemptive move that could preclude the need for massive federal bailouts.

[Hank Wernicki]

Oil soars, Platinum rallies

http://twitter.com/#!/Frac_Man

[rc]

Neo-mamma: I just watched the Kelly inteview also. She's very good -- in control of her emotions and logical. I think she was a former prosecutor?

The Sheriff, on the other hand, lacked self-control and exhibited his partisansip which is inappropriate for his role. The shooter seems likely to be a schizophrenic. If so, that means he has a thought disorder. He can't be a conservative or a liberal -- he's irrational.

Often it's not the news story itself that's most interesting, but the reactions. One side is glaringly trying to use a tragedy for political gain by demonizing and marginalizing the other. We all know this is an underhanded tactic that's been used before.

[Mamma Boom Boom]

This is what I've been saying: (think south sea bubble)

---Harry Shultz's Last Newsletter: We Are Way Worse Than The 1930's---

“Roughly speaking, the mess we are in is the worst since 17th century financial collapse. Comparisons with the 1930’s are ludicrous. We’ve gone far beyond that."

[?]

rc,

"Neo-mamma: I just watched the Kelly inteview also. She's very good -- in control of her emotions and logical. I think she was a former prosecutor?

The Sheriff, on the other hand, lacked self-control and exhibited his partisansip which is inappropriate for his role. The shooter seems likely to be a schizophrenic. If so, that means he has a thought disorder. He can't be a conservative or a liberal -- he's irrational.

Often it's not the news story itself that's most interesting, but the reactions. One side is glaringly trying to use a tragedy for political gain by demonizing and marginalizing the other. We all know this is an underhanded tactic that's been used before."

********

You are right to the point. Always one side tries to take advantage politically by hammering the other side. If they cannot win based on the facts, then they will engage in character assassination. Until this stops, then there is little hope that there will be a real change in Washington DC.

[Hockthefarm]

I certainly agree with ? and others. Here is the take from Canada where they still call a retard a retard:

http://www.greaterfool.ca/

As for Palin, the gun sights are idiotic, something you would expect from someone qualified to teach grade 5 gym. I doubt she has ever read a book that didn't have at least 20 pictures to color in it.

If this means bye, bye Sarah, I think it is great for the country.

If it impacts the tea party movement, the only real movement to put government in its place, it is bad news indeed.

Hock

[Mamma Boom Boom]

Hock, I've never thought the Tea Party had any sticking power. Have you ever been to one of their meetings? Very shallow!

[Account Deleted]

SPX Analysis after closing bell
http://niftychartsandpatterns.blogspot.com/2011/01/s-500-analysis-after-closing-bell_11.html

[rc]

? I agree. We should stand up against character assassination, no matter the side, and demand ideas be the subject of debate.

[?]

Hock,

So far so good on the Ravens prediction. Saturday's game should be fantastic.

[rc]

Neo-mamma: what's going to cut into corporate profits... and then there's all that cash? Or has the cost-cutting productivity squeeze reached its limits? Here we are, another round of reporting and "beating estimates"?

[Michael]

Yelnick,

Given all of the above that you have laid out, how is it that Goldman Sachs and Jan Hatzius turned BULLISH for the first time in 5 years (last month) and see GDP growth over the next two years to a 4% pace by early/mid 2012 . . . driven by underlying final demand, or "organic growth"?

http://www.investmentpostcards.com/2010/12/06/goldman-turns-bullish/

[yelnick]

Michael, gimme a break on GS BS! The Vampire Squid has been wrong quite a lot in the last five years. Why weren't they calling a top in June 2007 when I did? Why didn't they call Dow10500 in Jan 2009 as I did (and still expected a drop first)? Why didn't they turn bullish in Feb 2009 when I turned bullish? Why weren't they bullish in July 2009 when I remained bullish and dissed Neely's call? And if you read my predictions from a mere week ago, I expect S&P over 1300 before this is done.

[Hockthefarm]

Hock, I've never thought the Tea Party had any sticking power. Have you ever been to one of their meetings? Very shallow!

Not a member but did have a peripheral view of a meeting here in Colorado. My take is that they hate big government and they hate government debt. That is good enough for me. My other difficulty is this notion that government must induce RE booms. First here, then Oz and Canada. Appears to be very bad policy imo. Read up on critical mass.

Hock

[Hockthefarm]

?

"Saturday's game should be fantastic."

Flacco is coming along. I think he is the next big star. As Flacco goes, so go the Ravens.

Hock

[Hockthefarm]

This Hugh Hendry interview is priceless. His comments on banks are right on the money. Government is scared chitless of big banks:

http://pragcap.com/hendry-china-remains-a-black-swan

Hock

[Mamma Boom Boom]

rc: The only reason profits are so strong is because in 2008-2009 they wrote off everything they could get their pens on. So, in 2010 every penny earned shows up on the bottom line, no where to hide. Going forward, raw material prices are squeezing margins for many companies. Plus, they just can't get any leaner. Little by little, profits will disappear.

[Michael]

"Michael, gimme a break on GS BS! The Vampire Squid has been wrong quite a lot in the last five years. Why weren't they calling a top in June 2007 when I did? Why didn't they call Dow10500 in Jan 2009 as I did (and still expected a drop first)? Why didn't they turn bullish in Feb 2009 when I turned bullish? Why weren't they bullish in July 2009 when I remained bullish and dissed Neely's call? And if you read my predictions from a mere week ago, I expect S&P over 1300 before this is done." - Yelnick

I'm responding to your article talking about the ECONOMY.
Not the S&P, Duncan.

[Oodie]

I just read www.marketletters.com and I have to say I really like it...technical analysis and trading recommendations for S&P 500, Hang Seng, ASX 200, AUD and Euro. Worth checking out....

[chanel purses outlet]

Wanting to learn everything about cinematography and acting, he worked with his father during the production of Koyla and Karan-Arjun. Later, he even helped his father during the scripting stages of Kaho Naa…Pyaar Hai, not knowing that his papa had chosen him for the lead role.