Revisiting GDP
When the Q4 2006 GDP data was initially released at 3.5%, we noted that it did not comport with the data we were seeing elsewhere. And in January, we approvingly referenced Caroline Baum's analysis (Q4 Data Doesn't Add Up).
Then last week, the Commerce Department released their data on Inventory levels. Based on that, it turns out that our prior criticisms of GDP were dead on:
"U.S. wholesalers' inventories took the biggest tumble in more than three years during December as overall demand for their goods raced forward.
Wholesale inventories decreased by 0.5% to a seasonally adjusted $393.76 billion, the Commerce Department said Thursday. November inventories rose by 1.1%, adjusted from a previously reported 1.3% climb.
The 0.5% decrease in December wholesale inventories surprised Wall Street, which expected a 0.5% gain. It was the sharpest drop since 0.6% in May 2003."
Inventories being drawn down are different than actual production of goods. Hence, this is why the Commerce data overstated Q4 GDP by as much as 75 basis points (my estimate) to 100 basis points (JPMorgan's est.).
That's prior to the release of the Import /Export data, which as the WSJ noted, was huge:
"The chasm between what America buys from overseas and what it ships abroad got wider during December for the first time in four months, due mostly to a resurgence in oil prices. The Commerce Department said the trade shortfall increased 5.3% to $61.18 billion from $58.12 billion in November. That capped a year which saw the deficit swell to $763.6 billion, a 6.5% increase from 2005, and it was the fifth straight year in which the trade shortfall trampled a previous annual record."
Have a look at these two charts. The first is the official Commerce Department data, based only on the prelim GDP. The second chart reflects our new estimates based on the latest inventory data -- but not the increase in Imports:
The original release (above) gives the impression of an economy moving sideways, growing at a consistent rate between 3 and 3.5%. This is consistent with the soft landing thesis many of the strong Bulls believe in.
Reality check. With the new Inventory data from Commerce, however, that rosy scenario fades away. First, most of the big GDP pop came when rates were at generational lows and were that way for a year. This artificial stimulation is what gave the economy its pop:
GDP (expected revision)
Using the most recent J.P. Morgan estimates (chart 2), we see that GDP has actually been on the downslide since peaking in late 2003/early 2004.
If we were to add the Import/Export data to this, that dings this even further downwards -- We are looking at a GDP of potentially 2-2.5%.
If the economic deceleration continues on (as I suspect it will), there is a very real possibility we will see GDP slip to 1-2% by mid 2007.
Goldilocks has left the building . . .
>
Sources:
MONTHLY WHOLESALE TRADE: SALES AND INVENTORIES
U.S. Census Bureau News, DECEMBER 2006
http://www.census.gov/mwts/www/currentwhl.html
Trade Winds
TIM ANNETT
WSJ, February 13, 2007 12:45 p.m.
THE AFTERNOON REPORT
http://online.wsj.com/article_print/SB117137119901207152.html
Wednesday, February 14, 2007 | 11:48 AM | Permalink
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BigPicture (Barry Ritholz's outstanding blog on the economy, markets, et.al.) has mentioned some serious difficulties with 4th quarter GDP numbers that are really worth drawing your attention to. Because of problems with inventory estimates Q4 GDP is l... [Read More]
Tracked on Feb 14, 2007 7:07:49 PM
Comments
Excellent analysis. I couldn't agree more. I have been very surprised to see the market continue to climb. It seems like a lot of wishful thinking.
Posted by: Mike M | Feb 14, 2007 12:03:26 PM
I noticed that retail sales for December was bumped up. Would that cause an upward revision to Q4 GDP or does that revision not typically move things that much?
Posted by: Steve | Feb 14, 2007 12:08:15 PM
"Goldilocks has left the building..."
Thank ya, thank ya very much.
.
Posted by: VJ | Feb 14, 2007 12:12:48 PM
What is the link to the JP Morgan data?
Posted by: vader | Feb 14, 2007 12:25:45 PM
Barry:
Need another inflation post! Bernanke is saying all sorts of truly intelligent stuff.
Posted by: Mr. Beach | Feb 14, 2007 12:41:59 PM
Gotta say, this is pretty ominous coming from Bernanke today. Sounds like he's warning of the possiblity of a hard landing:
The risks to this outlook are significant. To the downside, the ultimate extent of the housing market correction is difficult to forecast and may prove greater than we anticipate. Similarly, spillover effects from developments in the housing market onto consumer spending and employment in housing-related industries may be more pronounced than expected.
Posted by: anon | Feb 14, 2007 1:54:56 PM
Goldilocks may have left the building,
However, it looks like she is now on Wall St. bidding up stocks.
DJIA= all time high
Transports= all time high
and yada, yada, yada...
Good thing I burned all my old college finance/economic books last fall....they are worthless to describe our current economy or the stock market.
And one last thought...
I think we have a "jack in the beanstalk economy"
1)buy "magic" beans
2)steal golden goose
3)become rich
4)happy ending (or at least for JACK)
Posted by: MarkTX | Feb 14, 2007 2:27:27 PM
You say Goldilocks has left the building?
What I see when I look around is that maybe, finally, the long, grinding bear market that started last Thursday is over. God, it was devastating—seemed like it would never end. The wealth that must have been destroyed!
Posted by: SF | Feb 14, 2007 2:59:55 PM
and thank goodness that magic beanstalks CAN grow to the sky, and BEYOND!
Posted by: lurker | Feb 14, 2007 3:07:31 PM
"Goldilocks has left the building . . ."
Not according the the only thing that matters this instant...... market prices. Equities are screaming once again.
Posted by: emd | Feb 14, 2007 3:44:03 PM
21 lenders croak since Dec 06??
is this real?
http://ml-implode.com/
Posted by: saltwater | Feb 14, 2007 4:28:44 PM
Was it just me or did Mr. B sound very nervous today, while delivering his speech?
Posted by: Aaron | Feb 14, 2007 4:31:52 PM
> Good thing I burned all my old college finance/economic books last fall....they are worthless to describe our current economy or the stock market.
MarkTX funny yet so true.
Bush economic policy can be summed up in one phrase i.e. "screw middle class Americans for at least 1 generation and loot the US treasury as much as possible while giving away huge tax breaks to the super rich and huge no bid contracts to their GOP cronies".
Posted by: km4 | Feb 14, 2007 4:35:00 PM
Bernanke is probably upset at the current weakening going on the last 4 weeks with the housing market. It is clear and evident. Whether it continues on into March means alot to the mind of the Real Estate business. We all know they are overstaffed compared to demand. They still are at 2005 levels with labor and have taken a hit hoping the market would rebound by spring. Bad pysch in March would mean a reversal.
If business keeps getting worse by March, the entire industry and its labor force may be having a nice parting of ways(alot of old friends saying goodbye) and different outlook for the US economy.
Posted by: Cherry | Feb 14, 2007 4:55:11 PM
Something happened today that hasn’t happened since March 17, 1998
new closing highs for the Dow industrials, Dow transports, and Dow utilities all at once
Posted by: Short seller | Feb 14, 2007 5:01:24 PM
Something happened today that hasn’t happened since March 17, 1998
new closing highs for the Dow industrials, Dow transports, and Dow utilities all at once
Which means Barry will probably finally get his 2% correction considering this "current" rally is based on nothing essentially and much like the suckers rally that busted 2 weeks ago, the pain down will be sharp as the pain up for a day or two.
Posted by: ac | Feb 14, 2007 5:06:24 PM
Well, all I can say is, BR, the stock market is saying "You can revisit my mofo'ing ass."
...and those are some "Eclectic comments, well worth it."
Good nite, one and all.
Posted by: Eclectic | Feb 14, 2007 5:50:43 PM
Barry how about the ECRI indicators doing.Are they accelerating or pointing towards a weak economy?
Posted by: jagmohan swain | Feb 14, 2007 6:06:57 PM
The stock market has nothing at all to do with the economy. It is simply going up on momentum and the fact that this has been a very long bull market that has erased all fear. The market did the same thing in 99 and early 2000. Did that have anything at all to do with the economy or corp earnings (sorry I meant lack of corp earnings)? I still find it hard to believe the fed can print our way out of facing the consequences of 2 giangatic bubbles. The world I live in you just can't get something for nothing. Sooner or later the house of cards will collapse.
Posted by: Gary | Feb 14, 2007 6:13:26 PM
I think you mean the house of "credit" cards..... right?
Posted by: lurker | Feb 14, 2007 6:35:59 PM
>Bush economic policy can be summed up in one phrase i.e. "screw middle class Americans for at least 1 generation and loot the US treasury as much as possible while giving away huge tax breaks to the super rich and huge no bid contracts to their GOP cronies".<
What really galls me are the conservatives trumping this economy and the "good" news about a $200B federal deficit as proof that "the tax cuts work." But somehow the economy of the mid-to-late '90s wasn't evidence that "tax increases work, too."
Posted by: seamus | Feb 14, 2007 8:27:52 PM
Aaron re Bernanke sounding nervous....I try to listen to him when I can. He always sounds nervous. I remember his first testimony and he sounded really nervous. I cannot imagine what it must be like to be in his seat. I don't think that it was the content of what he was speaking but rather the venue. I'd be shaking and a stuttering
I must say I have alot of respect and admiration for Ben.I think that he is trying to sound the alarm in an articulate and thoughtful way. I appreciate his tackling some of the tough issues. I have confidence in his leadership--even though he may be of Guttenberg descent.
Posted by: Leisa | Feb 14, 2007 8:29:46 PM
Leisa,
When he talks of (paraphrz) "not wishing to regulate the derivatives-trading hedge funds," there's a good reason he's nervous... as nervous as a dog crappin' on a rattlesnake.
Posted by: Eclectic | Feb 14, 2007 8:55:27 PM
>Bush economic policy can be summed up in one phrase i.e. "screw middle class Americans for at least 1 generation and loot the US treasury as much as possible while giving away huge tax breaks to the super rich and huge no bid contracts to their GOP cronies".<
Just Like my burned books...ALL SMOKE!!!!
Posted by: MarkTX | Feb 14, 2007 9:05:44 PM
I heard the Federal Reserve is considering a new commercial paraphrasing the old E.F. Hutton commercial: When Ben Bernanke talks, people buy.
I'm still trying to understand the new Wall Street math: as I understand it:
1 Bernanke Delusion > 13,000 lost jobs + 0% retail growth.
Posted by: Winston Munn | Feb 14, 2007 11:03:23 PM
