GDP Misses, QE3 Gains, Oil Looms

We had a chance of snow on the streets of San Francisco, but the weathermen missed. We had expectations of GDP being revised up (from 3.2% to 3.3%, with whisper at 3.4%) but the economists missed. Now the reaction is coming in:

• JP Morgan lowered its Q1 forecast from 4% to 3.5%
• QE3 is now considered more likely (bolstering stocks)
• The dreaded double-dip is now back in the punditry

Quite a leap. Even with the downward revision, Q4 GDP at 2.8% was up from Q3 (2.6%) and Q2 (1.7%). CalculatedRisk provides an historical chart to show where we are in context; you will see that GDP on a quarterly basis often jumps around a bit:

Still, it remains clear that this recoverlyless recovery is much less robust than prior ones, which is even more surprising given the depths of the fall in 2008; usually after a deep drop we get a rapid pop. Just look at the pops after the double-dip in 1980 and 1982, the start of the chart. The recovery in the 1930s had multiple years of double-digit growth, while we remain below the 3.3% long-term average. 

Worse, the trendline is now turning back down, albeit we remain a ways from a double-dip. From Econoday:

What is driving the reversal seems pretty clear:

1. Oil prices
2. State government austerity

There is something else, swimming under the surface. We had been told that the consumer was back and spending was up. In this revision, a drop in the prior consumer spending estimate had a major impact on the revision; and overall real domestic spending dropped 0.6% whereas it had grown 4.2% in Q3. Purchases of durables went up in January but had been declining in Q4. The January blip was solely due to aircraft orders, which tend to be extremely volatile. 

Capital goods outside of transport actually plunged in January, down 6.9%. Sy Harding reports on Alan Abelson's column in Barron's this weekend, which quotes David Rosenberg: 

Demand for these capital expense items tells you a lot about the strength of industry. It was a prominent linchpin of 2010’s 15% gain in capital spending, which in turn helped mightily to power the recovery – such as it was. Last month’s drop in orders was the worst since January 2009, when the economy was up to its nostrils in recession. The consensus estimates for GDP, as Dave points out, are well north of 3% for the 2nd quarter – and that doesn’t quite square with the minus build in core capex orders so far this quarter.

The wildcard in the double-dip vs QE equation is oil. The turmoil in the Middle East strikes many like the Fall of the Berlin Wall, but as it works its way through, oil prices will be on edge. The impact of higher oil prices on US GDP is being estimated vigorously right now. High oil acts like a tax on consumers. One estimate is that the recent oil spike, if it sustains over 2011, will act like a $700 tax on families, lowering GDP by 0.5%:

Reuters provids an interactive graphic on oil and GDP, courtesy ZH:

One thing to keep in mind is blind extrapolation leads to poor decisions. The oil spike may be peaking, not trending. If the US were to restore drilling in the Gulf and elsewhere, the drivers of high oil prices would bend quickly, but even short of that, whatever else happens in the Middle East, they need to keep the oil flowing to feed the rioting people. Europe is apparently pushing the US to to stop the bloodshed, which is out of control by a despot trying to maintain his grip at any cost, and get Libyan oil flowing again. The start is the UN launching sanctions, and getting Qaddafi investigated for war crimes, only the second time the UN has taken that step. 

Put all of this together and 2011 looks like a slower growth than expected but not an outright double-dip, which makes QE3 questionable. Being in the muddled middle freezes decision-making. 

Comments

[Zenga Zenga]

Another bearish post. Rally coming?

http://www.youtube.com/watch?v=cBY-0n4esNY

Roger is gone but Yelnick the bear lives on.

[twitter.com/Frac_Man]

Isn't a tenet with EW that news has no bearing

On the markets ?

Ditto for Fractals ?

How does one reconcile this confict ?

[Ray]

QE2 goosed equities and commodities, but QE3 will drive commodities higher still. Many long only equity and fixed income managers I speak with believe the Fed will stop in June (although they thought QE2 was a long term mistake, for a short term gain). Look no further than WMT's US same store sales: down seven quarters in a row. They cater to middle and lower income customers, but that customer can no longer afford to shop there so now has to shop at Family Dollar. These are the unintended consequences of the Fed policies.
Ray

[yelnick]

frac_man, in EWI news and markets are both responding to the same underlying forces, so view news as coterminous with market moves. this is why the aphorism 'buy on rumor, sell on news' seems to work. by the time the news hits public consciousness, the force is almost spent and about to reverse. we may be seeing that now with oil. might be peaking along with the culmination of this stage of the Arab Revolt.

News can jink markets across short term time frames, but note that after markets reopened post 9/11, a huge rally took place almost back to the 2000 highs. If bad news drove markets down, that should not have happened.

[Virgil]

The whole world rallied after 9-11. Remember they were even saying "we're all New Yorkers" in Paris. NATO invoked their collective security doctrine for the first and only time in history. Unity reigned supreme, if only briefly.

Looking at the Dow Jones chart from '37 to '42 is interesting to match up the market moves to the events unfolding in the world. Ugly correction. News didn't travel that fast, and was largely censored as in the case of the disastrous Battle at Dunkirk.

[Hockthefarm]

Y:

Do you think we see 1250 - 1280 on the spx or is this correction already done?

This week should be positive, just like the first few days of every month it seems. Then maybe a little shake out. Dent likes the 1250 to 1280 stuff and I think Tony hit his mark for a correction to occur.

Hock

[yelnick]

Hock, I still expect thismarket to continue north, driven by QE3 expectations among other things. Hence a retrun to the Jan levels (1275) may be the limit down

[Dsquare]

"The whole world rallied after 9-11. Remember they were even saying "we're all New Yorkers" in Paris. NATO invoked their collective security doctrine for the first and only time in history. Unity reigned supreme, if only briefly."

Yeah, Bush fooled everybody.

[Mamma Boom Boom]

>QE3 is now considered more likely<

Try this little rhyme: "QE Infinity"

Neo-Mamma

[Mamma Boom Boom]

Bernie Madoff tells New York Magazine:
"I realized from a very early stage that the market is a whole rigged job. There’s no chance that investors have in this market. The whole new regulatory reform is a joke. The whole government is a Ponzi scheme."

[Hockthefarm]

The whole new regulatory reform is a joke. The whole government is a Ponzi scheme."

I don't think anyone ever accused Bernie of being stupid. A quick look at RE in this country confirms his assertion. And with so many people opting out of their homes here in the USA Republicans must believe that the quality of our citizenry has taken a dramtic fall. Isn't there a literary term for something that sounds as studid in reverse as it did playing forward?

Hock

[Mamma Boom Boom]

>Isn't there a literary term for something that sounds as stupid in reverse as it did playing forward?<

Probably, but I don't know it. Also, I don't know where it all ends. But my guess is, it's a long way off and will look nothing like the world I grew up in.

Neo-Mamma

[Hockthefarm]

Here is a great note from Hussman. Our government is a classroom of 5 year olds, with open paint jars and no teacher:

http://hussmanfunds.com/wmc/wmc110228.htm

Hock

[joe]

Yelnik - please tell me if you think this is crazy.

I took the chart, turned it upside down and started a likely five way count - that is, 1344 (SP) begins a new count (down). If it does the second wave will have to nearly equal that start point - a double top. At or near that 1344 level would start a third wave down. It would almost certainly take out the 1275 level probably a lot more.

Someting like - 1344 drops to 1294 - rallies to 1343 appx and then a third wave down, much lower than 1294.

Frankly, I think a rally on lower volume and a failure in transports to confirm - would be a shortable scenario.

I think it is likely, too.

Just IMO -

Joe

[DG]

Isn't a tenet with EW that news has no bearing

On the markets ?

Ditto for Fractals ?

How does one reconcile this confict ?

Only price matters. The only people who get paid for news are the people who publish it.

[yelnick]

Joe, a rally to 1343 would stress the odds for the bears. Today we closed a gap (1327) and got back to a good level to reverse (62% in the Dow). Thing is, the first day of the last bunch of months have all been up. The pattern of an up day in month –1 to month + 2 is pretty clear since QE2 launched. We might get back to 1333 in the S&P, a 78% retrace, and stall; but the odds say a stronger up move for the next two days. 

Yes, the fall off 1344 looks like a "5", although some pundits count it as a "3". As you know, as a "5" it means we can go all the way to your 1343 but cannot go any further. Consider this a good wave theory test to watch.