Three Things to Know About the GDP Report

Pre-market GDP disappointed at 3.2%, below expectations (3.5%) and whisper (4%) although above Q3 (2.6%). GDP hit an important milestone: we have recovered from the drop and are back at 2007 levels. The Great Recession is over! So why did the market react so badly?

The consensus opinion points to Egypt, not GDP, but Egypt had been in turmoil for several days as the market kept blissfully rising. The financial press always try to pin a market rise or fall on some news event, when technical conditions are the more likely culprit. Lost in the noise were disappointing earnings from Microsoft, Ford and Amazon, which may have had more to do with the fall. 

The best line was that the market that was looking for a reason to correct and got it in the form of Egypt's public protests. This market had been peaking since Monday and was showing signs of exhaustion. The past few days show a Fractal Finance plateau that was bifurcated to the downside by the close (see chart, courtesy SlopeofHope):

The pattern looks ominously like last April, right before the Flash Crash. As one bear pundit put it, if the market gets smoked Monday at the open, the hedge funds may short with a vengeance.

Past Monday, the question is: does the GDP report give guidance as to the future direction of the market? Is this just a momentary overreaction to a spike in oil prices and fears of a widening Arab revolt, in which case stocks will resume their upwards trajectory, or does the GDP Report throw doubt on the recovery and thereby corporate earnings? Three key things to watch:

1. Final Sales vs Growth. Final sales were up strongly, a good sign, but overall growth is mediocre at 2.8% YoY, meaning the consumption-driven Q4 is not sustainable. The trajectory is for less growth in 2011, a warning flag for a recovery, where we should be accelerating growth right now. 
2. GDP Deflator vs Inflation. The inflation indicator the BEA uses came in very light at 0.3%, with the core PCE component at 0.4%, the lowest level since 1959! If it had come in at expectations (1.6%), real GDP would have been almost halved to 1.9%. It may be it was light due to rising imported oil, which gets subtracted; but the core GDP deflator (which the Fed prefers) also declined. This very low inflation seems inexplicable given rising food and energy prices, and is likely to be revised up, lowering GDP. 
3. Inventories vs Imports. Inventories were down, lowering GDP, and imports were down too, helping GDP. Usually nventory drawdowns are good, as they presage future production to refill, but in this recoveryless recovery, Econbrowser observes that we seem to be substituting imports for inventories. As a consequence, while they expect inventories will be less a drag on GDP as they have recently, imports should go up and exert a drag of their own. See final chart for the inverse relationship.

This report looks inexplicable, with a ying/yang across those three things to watch, and is likely to be revised downwards. Karl Denninger took a look at the core conundrum in this report (I paraphrase):

how do you get an acceleration in spending with a decrease in imports, since we are not suddenly moving all those electronic gadgets back to being manufactured in the US?

He concludes that consumption number is driven up by inflation, an increase in energy and food costs, not a large increase in units. The inflation indicator for personal consumption increased to 2.1% compared with 0.7% in Q3. (The GDP core PCE deflator mentioned above excludes energy and food.) Use that 2.1% instead of the 0.4% of the report and GDP would be less than 2% again. 

My take: the year-end optimistic reports by Goldman Sachs and others of an increase in 2011 GDP as compared with 2010, to 3.5% or higher, looks at risk. Instead, it looks like the period from 4Q2009 to 4Q2010 may have been the high water mark, and we are beginning to slow down as stimulus abates.

Yesterday's op-ed in the WSJ from economist John Taylor (who would make a really great Fed chairman), which was adopted from his testimony last week to Congress, is the best I have seen to explain the conundrum we are in: the very ad-hoc and one-time efforts to jump-start the economy has kept it in a funk, unable to heal itself:

The one-time stimulus payments to people did not jump-start consumption. The stimulus grants to states did not increase infrastructure spending. Cash for clunkers merely shifted consumption a few months forward. The Fed's purchases did not have a material impact on mortgage interest rates once changes in risks are taken into account. At best these actions had a small temporary effect that dissipated quickly, leaving a legacy of higher debt, a bloated Fed balance sheet and uncertainty—all of which slow growth and job creation.

An economy on life-support is not an economy in recovery.

Comments

[Michael]

I highly doubt that Jan Hatzius' reversal from bear to bull on the Economy (back in early December) is "highly at risk". Something bigger than meets the eye must be going on in the Economy for a noted Wall Street BEAR of 5 years to change his view to something much more substantial than sub-trendline growth.

Thus, I don't believe that he's jumping from a 1-2% GDP forecast for 2011 to 3.5% GDP for 2011 and 3.8% for 2012 on a whim, or what you believe is simply a consumption-driven Q4-2010. I'm not an Economist, but my guess is that Hatzius sees some underlying "rates of change" that are positive, such as the slowing pace of deleveraging and increased credit quality. My guess is that Hatzius and his track record of being the top economist on the Street will once again be confirmed with greater business investment this year with Obama's 100% write-off, comnbined with a better consumer and corporate balance sheet.

$91 of earnings for the S&P looks like a chip-shot. If you want to fade Goldman's David Kostin and his $96 of earnings for the S&P this year, and $106 for 2012... be my guest. It won't be the first time that the Perma-Bears have been wrong over the last two years.

[yelnick]

Michael, go back and read his call. First, it was a raise from 1.9% to 2.8%, well below the economists consensus of 3.5-4% for 2011. Second, he based it on GDP rising due to "organic" growth. not govt life support or inventory rebalancing. He expects organic growth to grow 5%. This GDP report casts doubt on that 5%.

[Hockthefarm]

Y:

Sy Harding points out this weekend that some of the big global bourses topped out in November. India and Brazil are now trading below their 200 day MA's and China is sitting right on it. A little tough to blame that on Egypt.

Hock

[Chabazite]

Mama - "Maybe this leg only takes us down to 900 by mid to late summer."
-----------------------------------------------------------------------
Only? Could the Bernank survive a drop of this magnitude? Other than a climb in the indexes he has precious little else to show for his $600B of QE2, and nothing at all to show for QE1. Won't be the investor's darling then! Chab.

[Michael]

Yelnick,

I believe that you are mistaken that Hatzius is looking for a mere 2.8%. He's forecasting 3.4% in 2011 and 3.8% in 2012.

http://seekingalpha.com/article/245134-jan-hatzius-vs-warren-buffett-on-the-direction-of-interest-rates

http://www2.goldmansachs.com/ideas/global-economic-outlook/2011-economic-outlook/index.html

He sees the US Economy at above trend growth by end of 2011 and into 2012. (3.5% - 4%).

:)

[da bear]

I think EWI is correct on stocks. The rally since last July is wave 'c' with wave 'a' being the rally of the March 2009 lows. The Flash Crash corrective phase was wave 'b'.
The wave v then should be a bit higher. In my Report I am also calling for a little more rally.

On the precious metals side I think gold and silver are in a wave 'c' up off the Fall 2008 lows. I stated this in my Report. Wave 'a' then was the sharp rally from 1999/2000 to Spring 2008 with the sharp plunge in the middle of 2008 was wave 'b'. Since this will turn out to be a three wave rally, then it is a corrective rally thus making it a giant wave B of IV rally of the January 1980 highs. This is in agreement with EWI's long-term silver count. So I think gold has the same count. So stocks might top out first, then metals. Then each will fall into multi-year lows possibly within 18 months.

da bear

[jbr]

GDP: Consumption was up, income was down, so it came from savings - NOT sustainable.

QE2 raised (instead of lowering) interest rates: Just as fiscal easing won't alter consumer behavior unless it's perceived to be permanent (ie, permanent lowering of marginal tax rates, corporate tax rates, or capital gains rates vs one time tax credits), monetary easing (ie, QE2) won't alter bond market behavior to lower interest rates unless it's perceived to be permanent. However, the bond market knows significant monetary easing can NEVER be permanent without causing a currency crisis and hyperinflation, therefore long rates are not and never will respond to the Fed's monetary easing on a sustainable basis.

jbr

[Ray]

Michael,

I understand what you're writing, but I believe what Yelnick and others believe is the all of the billions in governmental stimulus has masked the true weakness of US economy. This has been the weakest post-WWII recovery on record. I believe it's because of governmental interference be it the 2009 stimulus, QE1&2, the housing plans, etc. The private sector really never had a chance to get recover on its own. It's my belief we'll look back on this period several years from now, just like we study the 1930's today, and wonder why unemployment never really recovered, why GDP continued to stagnate, why the stock market rallied, then fizzled (it will), etc.

Look at the housing market. It sure looked like a recovery until the subsidies ended last summer. Now? We're in double dip territory. QE1 was a smashing success until it ended. People forget but the Dow was at 9600 back in July and people were talking about a double dip recession. The Fed panicked and wouldn't let the MBS they own mature (only ~$7B per month!) and said they would purchase Treasuries with this money. This led to more Monopoly money via QE2. What happens when QE2 ends? Is this Housing all over again? Time will tell, but when you factor in 10% of GDP being spend in deficit spending and we're barely getting 3% in GDP growth, something is terribly wrong. Remember. Q4 '09 GDP was ~5.5%, but 2010 GDP was ~2.3% including $1.5T in deficit spending!

I'm not Bush lover; in fact he got us in to most of this mess, but it's clear to me once this free gov't money spigot slows, 4% GDP growth is not in the cards.

Ray

[Hockthefarm]

8 Track kid:

"I have found that the hard-working people having the toughest time are those with too much CC debt, who refi-d their home at the top (2007-2008), and, or, had not prepared for any bad times."

At the end of the day, this was all driven by bad government. We had our winter festival a few weeks back and all the college kids were out doing the dumb things I did way back when (back when a smoke was a smoke and groovin was groovin. You probably have that on 8 track).

Apart from health and happiness these kids will have 3 big expenses in their lives: pay for their education, buy a house and pay the interest on the national debt they inherit.

Obama continues to drive up the cost of education with his policies.

Obama is pulling out all stops to artificially prop up house prices and prevent market equilibrium.

And he is doing it by creating national debt
at rates never heard of, let alone seen.

I'm not really tuned in to the political beat at our universities these days, but you have to think that at some point, Egypt will look like a wine and cheese party. Nature hates a vacuum and it is just a matter of time before this one gets filled.And I think the ring leaders will have little difficulty swinging the rational their way.

Hock

[Mamma Boom Boom]

>Could the Bernank survive a drop of this magnitude? Chab.<

Who's going to run him off? Those guys have proven they own the government.

[Mamma Boom Boom]

>Obama is pulling out all stops to artificially prop up house prices and prevent market equilibrium.<

There's a bill, floating around in congress, to repeal his meddling policies.

[Mamma Boom Boom]

Coming to the community near you.

http://www.youtube.com/watch?feature=player_embedded&v=ThvBJMzmSZI

[Mike]

Hock,

You are blaming the high cost of a College Education on Obama???
Please explain.

And dont forget to include how the UC System has been, until just recently, on a 17 year pension contribution Holiday, which has absolutely nothing to do with Obama.

[Account Deleted]

GOOGLE Chart: http://niftychartsandpatterns.blogspot.com/2011/01/google-weekend-update.html

[Hockthefarm]

Mamma Mia:

http://www.youtube.com/watch?v=KF0gsbQKhD8

A time of hard work and economic profit. That is what I was handed. I went to a great school, got a good education and paid for about 75 percent of it with good summer jobs. Draft beers were 25 cents and we would order them 100 at a time. And that was just 30 years ago.

Hock

[Hockthefarm]

Mike:

We live in a capitalist country. What happens to price when government lets borrowing be what ever the debtor wants it to be? We have seen it in housing and education.

I thought my nephew was going to pop the question at Christmas. Turned out he dumped the gal in November when he found out about her school debts. What a mess.

Obama has done nothing to address the problem. Instead he wants me to pay off the student loans of anyone who works for the federal gubmint for 2 years. I've always enjoyed paying my taxes. I expect that will change in the very near future.

Hock

[yelnick]

Michael, Hatzius's original report in early Dec which garnered all the press was for a 2.8% growth in 2011 and 3.6% in 2012.  He later raised it as you have outlined to 3.4% and 3.8% after the Q3 report was revised upwards. I wonder what he does now? He still needs his 5% organic growth. Inventory rebalancing is over, government stimulus is done, and there is no obvious source of 5% growth. This weekend the CEA dissected the BEA report, and so did John Mauldin. Keypoints:

The really surprising number you saw the talking heads on TV mention was the growth of consumer spending, at 4.4%. Is the US consumer back? After all, real final sales rose by 7.1%, a number not seen since 1984 and Ronald Reagan. But real income rose a paltry 1.7%. Where did the money that was spent come from? Savings dropped a rather large 0.5% for the quarter. That was part of it. And I can’t find the link, but there was an unusual drawdown of money market and investment accounts last quarter, somewhere around 1.5%, if I remember correctly. (David Walker remembered that article as well.) That would just about cover it. But that is not a good thing and is certainly not sustainable. The recent round of inventory building is over. Inventory cycles generally run for a number of quarters, with the last building cycle running for 5 consecutive quarters and the last inventory draw-down lasting for 8 consecutive quarters. Inventories are likely to be a drag on the GDP over at least the next year.The recent rapid increase in commodity prices has caused a correspondingly rapid decrease in reported imports. Not reported is what the same rise in commodity prices has done to the purchasing power of consumer take-home pay. If the 31% swing in the quarter-to-quarter price of imported goods is correct, real discretionary consumer spending is about to take a serious hit.Additionally, the reported real (i.e., inflation adjusted) annualized growth rate of 3.17% benefited from a relatively low annualized inflation assumption of 0.3% for the quarter -- which contradicts a number of other current inflation estimates, including the December year-over-year CPI numbers (running 5 times higher at about 1.5%), the PPI finished goods numbers for December (reported to be over 10 times higher at a 4.0% annualized rate) and the BEA's own "deflater" for the prior quarter (which was set 7 times higher at 2.1%). Arguably, a major portion of the 3.17% growth would evaporate if the 0.3% "deflater" proves to be unduly optimistic.

[Roger D.]

ES_F 15min chart Uh Oh Watch out below! http://www.screencast.com/users/ETFtrader/folders/Default/media/0b394175-c2c3-4365-b13d-7e0f7abca0f0

If this count is right Oh boy, could my great unification wave down have started?

Roger D.

[Hockthefarm]

If won, the toy war would be a pyric victory at best. Our focus should be on the next manufacturing war, the one we better not lose:

Despite China's might, US factories maintain edge

By PAUL WISEMAN, AP Economics Writer Paul Wiseman, Ap Economics Writer – 2 hrs 13 mins ago
WASHINGTON – U.S. factories are closing. American manufacturing jobs are reappearing overseas. China's industrial might is growing each year.

And it might seem as if the United States doesn't make world-class goods as well as some other nations.

"There's no reason Europe or China should have the fastest trains, or the new factories that manufacture clean energy products," President Barack Obama said in his State of the Union address last week.

Yet America remains by far the No. 1 manufacturing country. It out-produces No. 2 China by more than 40 percent. U.S. manufacturers cranked out nearly $1.7 trillion in goods in 2009, according to the United Nations.

The story of American factories essentially boils down to this: They've managed to make more goods with fewer workers.

The United States has lost nearly 8 million factory jobs since manufacturing employment peaked at 19.6 million in mid-1979. U.S. manufacturers have ranked near the top of world rankings in productivity gains over the past three decades.

That higher productivity has meant a leaner manufacturing force that's capitalized on efficiency.

"You can add more capability, but it doesn't mean you necessarily have to hire hundreds of people," says James Vitak, a spokesman for specialty chemical maker Ashland Inc.

The industry's fortunes are brightening enough that U.S. factories are finally adding jobs after years of shrinking their payrolls. Not a lot. But even a slight increase shows manufacturers are growing more confident. They added 136,000 workers last year — the first net increase since 1997.

What's changed is that U.S. manufacturers have abandoned products with thin profit margins, like consumer electronics, toys and shoes. They've ceded that sector to China, Indonesia and other emerging nations with low labor costs.

Instead, American factories have seized upon complex and expensive goods requiring specialized labor: industrial lathes, computer chips, fighter jets, health care products.

H

[Michael]

US Consumer Spending ROSE 0.7% in December and higher than the 0.3% increase that was registered the previous month.

Chicago Purchasing Manager's report comes in at 68.8% vs 66.8% in December.

Maybe it's time to revisit all of those ECRI charts that were mistakenly forecasting the"Double-dip" last year, eh?

[Mamma Boom Boom]

Hock, your video is interracial. I don't that was tolerated 30 years ago.

Also, your rosy view of manufacturing is not helping the problem. I hope you're not a voter.

[Michael]

"I thought my nephew was going to pop the question at Christmas. Turned out he dumped the gal in November when he found out about her school debts. What a mess." - Hock

Sounds like your son is more interested in a balance sheet.
What a shame.

[Mamma Boom Boom]

Michael, I assume you didn't get the memo: consumer spending dropped like a rock, after the holidays, briefly to a record low. Dec was a mirage.

[Hockthefarm]

"I thought my nephew was going to pop the question at Christmas. Turned out he dumped the gal in November when he found out about her school debts. What a mess." - Hock

"Sounds like your son is more interested in a balance sheet.
What a shame."

I wish my son was interested in balance sheets. He still thinks money grows on trees. As for my nephew, all I can say is that life is about choices and he made one. I'd read about this stuff, but it becomes much more real when it hits that close to home.

H

[Wave Rust]

Hock

Wives are always least expensive before marriage. $100K in debt is manageable if future income is reasonable to pay it off in 3-5 years.

But $100K of debt for a woman who is going to be a teacher or social worker (salaries are relative to local cost of living) is like having a second nose. She would need to find a rich guy with 2 noses. :)

wave rust

[Mamma Boom Boom]

Wave, that story Hock told is an old one. It's been floating around the internet for about a year.

[Michael]

"Michael, I assume you didn't get the memo: consumer spending dropped like a rock, after the holidays, briefly to a record low. Dec was a mirage."

You are relying on data from Gallup.
Good luck with that.

[Michael]

Crude Oil surging to +$1.75 after being down earlier in the session. SPX +9.00 and the Coal Sector on fire once again . . .

ACI, BTU, CLF, MEE, NRP, PCX, and WLT.

MEE being bought out by ANR for $7.1 Billion.

Bears and "top-pickers" looking for follow-thru from Friday once again WRONG.

Wash, rinse, repeat.
Wash, rinse, repeat.

[Mamma Boom Boom]

Michael, are you really going to suggest that Gallup info is bogus?

[yelnick]

Michael and his critics: good Chicago PMI this morning, and it suggests tomorrow's ISM will be up, which is also good news. The fly in the ointment is this: while the Dec income/spending report looks promising, Gallup may be correct based on this little factoid on the income announcement today:

"Real disposable income increased 0.1 percent in December, compared with an increase of 0.2 percent in November.  Real PCE increased 0.4 percent, compared with an increase of 0.2 percent.."

This means the disposable income numbers are essentially flat except for inflation, and consumers are spending out of savings, driven by rising food and energy,  not an increase in core demand. 

The other key factoid:

Personal income less transfer payments increased again in December. This increased to $9,327 billion (SAAR, 2005 dollars) from $9,310 billion in November.

This is a very small increase (0.2%) and suggests that most of the rise in personal income was due to government transfer payments. 

As with the recent GDP report, the data is flopping around, not showing a consistent story

[Account Deleted]

SPY Chart: http://niftychartsandpatterns.blogspot.com/2011/02/spy-chart-analysis.html

[Hockthefarm]

Wave:

In talking to my brother the debt in question was close to 200 k$. And as mamma noted this sort of thing is now a consideration when debt assumption is required.

I pass no judgement, I wasn't there. What I do like is the notion that there are consequences when you borrow and serious consequences when you borrow too much. The gubmint hates this notion. They would love it if everyone increased their debt levels 50%. But at the end of the day it is the only reason we had this problem in the first place. We all say "Hey we bought a house". The reality is that few people buy houses. I can count the number that I know on one hand.

Hock

[Mamma Boom Boom]

Here are some facts about manufacturing, that will help you understand how Bill Clinton sold the American people out. He signed NAFTA in 1993, that started the trend. Within 5 years mfg. was being gutted. This info is a bit dated, it's worse now.

------------Look:

-Since 2001, the country has lost 42,400 factories, including 36 percent of factories that employ more than 1,000 workers, and 38 percent of factories that employ between 500 and 999 employees

-An additional 90,000 manufacturing companies are now at risk of going out of business.

-The last time fewer than 12 million people worked in the manufacturing sector was in 1941.

-Total manufacturing gross domestic product in 2008 represented 11.5 percent of U.S. economic output, down from 28 percent in 1959

-The U.S. trade deficit in goods and services in 2008 stood at $700 billion -- or more than $2,000 for every American.

-The United States is not losing old, inefficient industries that produce "buggy whip" products for which there is no more demand. Indeed, the U.S. is losing the industries of the future. In 2004, it lost world dominance in high-tech exports

-Today, the U.S. PCB industry (printed circuit board) is in free fall.

-What about the promise of the solar industry? There was only one American company among the top 10 worldwide in photovoltaic-cell production in 2008.

-The wind-energy industry? Only one U.S. company ranked among the 10 largest in the world.

-In 2007, only 8 percent of all new semiconductor fabrication plants were located in the United States.

-In 2008, 12 percent of all the cars produced in the world were made in America. China has now surpassed the United States in motor-vehicle production, as has Japan

-The U.S. steel industry produced 91.5 million tons of steel in 2008, down from the 97.4 million tons in 1999. By comparison, China's steel industry produced 500 million tons in 2008, more than five times the amount of U.S. producers

-The U.S. machine-tool industry -- the industry that's the backbone of an industrial economy and the means by which all products are manufactured -- a paltry 5.1 percent of global output.

-American machine-tool consumption has collapsed in tandem with American manufacturing.

-U.S. producers of luggage account for 1 percent of the American market, but virtually every American owns luggage.

-U.S.based production of high-performance outerwear used by skiers, hikers, mountain climbers, bikers, police officers, and military personnel accounts for less than 1.7 percent of all of the outerwear sold to Americans.

-The furniture industry lost at least 60 percent of its production capacity in the United States from 2000 to 2008 with the closure of 270 major factories

There is little time to waste. "We need a modern-day Paul Revere," says Brian O'Shaughnessy, chair of Revere Copper Products, the oldest industrial company in the United States. "We all need to wake up and understand the forces of foreign economic mercantilism that are waging an economic war against us."

-Neo-Mamma

[Mamma Boom Boom]

------- HEADLINE --------

Former Managing Director of Goldman Sachs: Egyptians, Greeks, Tunisians and British Are All Protesting Against Pillaging of Their Economies

[Michael]

If anyone thinks that American Businesses will NOT be taking advantage of the 100% write-off feature in new investment in plant and equipment this year that the Administration put in place, they are sadly mistaken.

[Mamma Boom Boom]

Michael, you sound like this:

Jeśli ktoś uważa, że amerykańskie firmy nie będą wykorzystując 100% odpisu funkcji w nowej inwestycji w aktywa trwałe w tym roku, że administracja wprowadza w życie, są niestety w błędzie.

It's just noise.

[Michael]

And you continue to sound like a BROKEN CLOCK my friend with your Bearish call for weeks on end. How's that "paper-trading" account doing Mamma?

[Mamma Boom Boom]

>And you continue to sound like a BROKEN CLOCK my friend <

Garsh sakes, I didn't know you cared.

[Hockthefarm]

My conclusion:

Mamma is either a Millennial or she needs lifters.
She was not in highschool in the 70's or 80's that's fer dang sure.

H

[Mamma Boom Boom]

Hock, maybe I'm still in pig-tails.