Q4 GDP: El Stinko!
The Advance GDP report was released today, and it came in at half of the 1.2% consensus: 0.6%. This is a measure of Real growth, and is supposed to be adjusted for inflation.
A few highlights of the data:
• Consumption slowed to 2% from 2.8% in Q3; I suspect that only partly reflects real growth, meaning its partly inflated by price rises;
• U.S. exports continue to increase: Up 3.9% for the Q. Overseas trade added nearly half a point to Q4 GDP;
• Overall, the US economy grew 2.2% for the full year 2007 -- the slowest since 2002 (1.6%)
• Inventory build, which drove the 4.9% Q3 data, was totally absent. It sliced 1.25% from GDP, after adding nearly a point in Q3.
• Inflation remains sticky: Price index for personal consumption expenditures rose by 3.9% in Q4 after a tepid 1.8% in Q3. This was the second highest PCE # since 2001
• Q4 business spending rose 7.5%. Investment in structures went 15.8% higher (which seems an awful lot to me); Equipment/software purchases rose by 3.8%.
• Biz spending decelerated in the fourth quarter from Q3's hotter 9.3%.
None of this is a surprise to us, but I have two takeaways:
1) The Fed is likely to cut 50 bps today.
2) If we do, as my odds suggest, have an official recession, it likely hasn't started yet, at least according to the traditional measure: Two consecutive quarters of contracting GDP.
However, there are other ways to measure a recession. As to the official definition of what a recession is, consider Jeff Saut's comments earlier this week:
"The most accurate definition is proffered by the National Bureau of Economic Research (NBER) that frames it this way: “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale – retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.” Rare indeed, as seen in the recession charts we included in last week’s report and have attached again this week.
By studying the charts, one observes that until recently recessions have been a normal conclusion to the business cycle. As seen, however, recently this has not been the case. In past missives we have railed at the central banks, as well as the politicians, for their continuing efforts to prevent the normal business cycle from playing. They did it again last week when the Federal Reserve panicked and cut interest rates by 75 basis points with a concurrent $150 billion economic stimulus package from the politicos. And if this is a typical recession, such maneuvers will likely ameliorate the downturn. But, what if this isn’t “your father’s typical recession?”
As always, thats smart stuff from Jeff.
Q4 2007 GDP
graphic courtesy of Barron's econoday
Note that this is the first of 3 GDP releases, and may subsequently be revised up or down.
Sources:
GROSS DOMESTIC PRODUCT: FOURTH QUARTER 2007 (ADVANCE)
BEA/Commerce Department, January 30, 2008
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
“Not your father’s typical recession?!”
Raymond James & Associates,, January 28, 2008
http://www.raymondjames.com/inv_strat.htm
U.S. Economy Expanded 0.6 Percent, Less Than Forecast
Shobhana Chandra
Bloomberg, Jan. 30 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aI8xDNevVoxQ&
GDP Growth Slowed in 4th Quarter, As Housing Continues Its Drag
JEFF BATER
WSJ, January 30, 2008 10:05 a.m.
http://online.wsj.com/article/SB120169953721828519.html
Wednesday, January 30, 2008 | 10:17 AM | Permalink
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Comments
Shouldn't the Fed have done all their lowering in last week's announcement? Nothing they do now will surprise me, however. Rather than a seaworthy captain with steady hand on the wheel, we've got a magician pulling rabbits out of his hat when we least expect it. I find the Fed's use of the "surprise" element very unprofessional and very unsettling.
Posted by: karen | Jan 30, 2008 11:12:14 AM
Go to John Williams 'Shadow Gov. Stats' and use the pre Clinton measured rate of inflation and adjust the reported GDP accordingly. We have been in a recession for quite some time.
If you truely believe the contrived and hedonistic PCE stats then congratulation, YOU'RE not in a recession. Sucka...
Posted by: Ross | Jan 30, 2008 11:12:31 AM
We go from 4.6% to .6% in one quarter?
Sure.......you know if they didn't spend the last half of the year in complete and total denial then they may have actually been able to do something construc........
Yea right!!!
Ciao
MS
Posted by: michael schumacher | Jan 30, 2008 11:18:49 AM
Ross,
Damn, you beat me to that post.
Posted by: Steve Barry | Jan 30, 2008 11:19:00 AM
A great post would be a reconciliation of the huge gaps in data such as a stinko GDP, yet weekly unemployment claims and perpetually higher than expected employment rates. There is such a disconnect between the weekly unemployment claims and this GDP figure that a full accounting reconciliation needs to be undertaken.
Posted by: Stuart | Jan 30, 2008 11:24:37 AM
I think it was on BP where I read that Q3 was distorted because oil prices spiked so fast during quarter. That put a lot of money on the import side but the inflation had not rippled through enough to be caught by the deflater. I think I remember the deflater being at some historic low of ~0.8 for Q3. So do you think that eventual price carry over is at least part of the issue here with Q4?
Posted by: EricC | Jan 30, 2008 11:34:16 AM
RealTime Econ Blog at WSJ points out:
"Real gross domestic product grew at a 0.6% annual rate, well below the 1.2% consensus. But most of the surprise was in inventories, which actually declined. "
While here it's noted: "Inventory build, which drove the 4.9% Q3 data, was totally absent."
I think it's often better to get information from diverse sources -- "absent" doesn't contradict "decline" but it's....not the same, is it?
Very lean inventories have implications of course.
Posted by: halbhh | Jan 30, 2008 11:37:04 AM
Stuart,
I don't believe anything from the government at this point. There are 2 things I need to know. First, we have a massive debt bubble bigger than in 1929, caused mainly by the biggest housing bubble of all time that is 60% higher than anything ever seen in the US according to Shiller. Second, for months, stocks have rallied on weak volume and tanked on big volume. That data cannot be manipulated. Stocks will correct to at or below one times sales of 900 per share (my estimate), which anyone can do the math...900 on the S&P. That's best case scenario.
Posted by: Steve Barry | Jan 30, 2008 11:38:04 AM
lean inventories, Fed pumping in liquidity, & the most telegraphed recession or slowdown in history.
Posted by: kk | Jan 30, 2008 11:44:43 AM
Barry question!
As the fed inflates us out of this mess, and continues to take FFR down in the months to come, how does this affect the next fed cycle?
What I mean is, with such actions both in monetary policy, term auctions and govt stimulus, chances are we are going to over stimulate. Commodities will surge and we will probably see a strong 2009-2010..all this assuming the actions stabilize the fire fueled by housing and the financial ills that resulted.
How quickly will fed have to take these measures back? Once the fed reaches bottom, which we wont know until after it got there, do you see:
a) it staying there for a while/ A key argument against Greenspans decision when FFR went to 1%
b) being taken back rapidly via a few quick shots of rate hikes to curb runaway inflation?
No way the fed hits it perfectly given the size of stimulus. Curious on thoughts about this that we obviously will deal with in future
Posted by: UrbanDigs | Jan 30, 2008 11:47:36 AM
I have no idea what they will do, but anything less than 100 basis points is a Fed still behind the curve. It may be that FF will end up at 1% before this is all over.
For those of you who worry about inflation… money, credit and wealth are being destroyed every day in a way that will eventually turn the tide on inflation. It's the risk imposed on the f-i-n-a-n-c-i-a-l system itself right now that is the Fed's bigger worry… a far bigger worry than this lower than anticipated GDP and the Walking Around Economy (W.A.E.).
Were they to do 175, it wouldn’t surprise me at all. The only thing that would surprise me would be if they raised.
Posted by: Eclectic | Jan 30, 2008 12:02:25 PM
Go to comics.com and get the latest Steve Pastis 'Pearls Before Swine' strip. I'm not shilling for Pastis but he was a lawyer that went straight.
Surreal strip. It deals with the 'little guy'.
Posted by: Ross | Jan 30, 2008 12:03:52 PM
Eclectic-
Please elaborate on this statement of yours:
>>but anything less than 100 basis points is a Fed still behind the curve.>>
from the standpoint of it making one damn bit of difference excepting the PM's of the banks.
I'm a little confused as the Fed could come out and pay us to take money (not that far away if you factor in real interest rates) and it still would not do anything to curb the problems these banks put themselves in.
It is a token approach to a systemic problem .....no?
Ciao
MS
Posted by: michael schumacher | Jan 30, 2008 12:15:58 PM
i am convinced that we will get a 50 pt cut.
so now what? wait till evening and start shorting?
or wait till tomorrow?
or just dont do anything its too unpredictable?
Posted by: techy2468 | Jan 30, 2008 12:23:13 PM
The posters on here who veritably seethe with anger at what's happening at the Fed continually miss the point that Eclectic made so well.
The Fed's action are solely and strictly designed to prevent a swift short-term credit market meltdown. It's not about repealing the business cycle, it's not about trying to prop up equities.
Banks need to have a good spread cushion as they take their write downs -- and take them methodically.
You know, sometime I think some folks on here would really really REALLY like to see a depression. Take my word for it...you don't.
Posted by: Karl K | Jan 30, 2008 12:28:11 PM
Barry, you're right to give 'em hell. We haven't seen a serious down-turn, because we're in a "bubble economy", not a real business cycle economy. Paul Farrell talks about this over at Marketwatch, here:
http://www.marketwatch.com/news/story/america-land-bubbles-next-pop/story.aspx?guid=60CE4669-6814-4A48-A555-BE998EC6FC58&dist=SecMostCommented
Posted by: Mike | Jan 30, 2008 12:36:23 PM
KArl-
No anger here.......there seems to be alot of it in your post.
And actually I want to see the banks take some medicine. If that means that they are unable to extend credit( sort of already happening regardless of a fed cut ) then so be it. They put themselves in that position with the "too big to fail mentality" it's high time they pay for the lack of any risk profiles.
If the lack of any real risk modeling doesn't have some sort of consequence then it will be repeated and a far greater consequence will arise from it.
"it's not about propping up equities"
It's ALL about propping up equities. All you need to do is look at the timing of releases....either in response to a market sell-off (Tuesday) or coincidently one or two days before an options expiry-that has been done more than once in the last 6 months.
Credit markets didn't sell off on Monday......equities did.. hence the cut.
Ciao
MS
Posted by: michael schumacher | Jan 30, 2008 12:46:05 PM
ms - i agree. the fed has done a lot so far between rate cuts and targeting injections of liquidity to ease credit markets distress.
take control back from the market. they just cut 75 bps in reaction to global stocks plunging when no other central bank did anything and their markets took the worst of it as we were closed MLK!
Posted by: UrbanDigs | Jan 30, 2008 12:52:27 PM
Karl..
i am with you on this.
some people would rather see depression than inflation....or thats what they are trying to convey.
i am glad the FED is not listening to them....and its paying more attention to propping up the economy...
if that leads to equity bubble, what do i care....good for the speculators who are long...
if OIL prices can be kept below $100, we maybe able to inflate our way out of this mess to buy enough time to make some fixes for the long run....
right now we are a nation of debtors....its in our favor that dollar tanks....and inflation goes up(controlled fashion, please dont start talking about zimbabwe hyperinflation) leading to higher wages (outsourcing/offshoring may be the next thing which will be tackled by the politicians)
and i think if economy stays depressed we will see interest rate go all the way to .5%, and dollar may fall some more.
exports will get better and maybe there will be some pickup in local manufacturing.
Posted by: techy2468 | Jan 30, 2008 1:00:00 PM
I have to agree with MS here. Just as Iraq was ALL about oil, rates are ALL about equities. I suspect that the reason Social Security hasn't been turned over to prop up the market is that the confiscations were spent from the get go. Still, a lot of pension money is riding on that bull...
Posted by: karen | Jan 30, 2008 1:02:05 PM
Karl K, I would suggest that if we did/do get a recession/depression it will take less time to come out of it than it did back in the 30's. That would be a great time for the FED to lower interest rates, and get out of the way. From what I have been reading - Schumpeter, Hayak, et. al., we are not going to avoid the big one, by lowering rates. In an economy that has banks that are burdened by crushing debt loads, and comsumers that are saturated in debt, all that lower rates are doing is delaying the taking of the much needed medicine.
Posted by: Justin | Jan 30, 2008 1:03:15 PM
Mr Saut had another interesting thought in the article you reference...
"I could make a pretty cogent argument that the population employment growth increases by roughly 1% a year and, therefore, if GDP growth falls below 1%, we are not employing all the available talent, and consequently, the country by default would be in a recession -- but nobody agrees with my definition."
Posted by: Al Czervik | Jan 30, 2008 1:05:36 PM
why would anyone want us to enter a depression just because one thinks that the markets should work themselves out on their own?
Whats wrong with a recession? Honestly? Or, are things so screwd up from the last bubble that was inflated by ultra easy monetary policy, that our only hope is to repeat?
Posted by: UrbanDigs | Jan 30, 2008 1:06:05 PM
nevermind the TAF and the Repo process also targets the credit markets too.
Cutting rates at this point only improves the profit margin of the banks....
The level of financial acumen in this country is at a level where cutting rates is the ONLY thing that people truly understand. And they still have a hard time grasping that.
Let it fall now....get it over with......by stalling it you make it longer. Clean out the crap that the banks are clinging to and you allow the property market to return to a level of reality and, more importantly, buyers would return.
yes it would be painful and it would be counter to the industries mantra of "up is good" but we are kidding ourselves if we let these banks continue to lie and shift assets around that have little or no value-only the made up value for "shits and giggles sake-since that is about what they are worth at this point.......
If the system was allowed to cleanse......it actually might be ok by the end of this year-that does nothing about the bigger problem of excess inventory.. The longer they are allowed to defer ....the longer it is around.
Ciao
MS
Posted by: michael schumacher | Jan 30, 2008 1:06:30 PM
techy-
just stop....you make a fool of yourself each time you comment.
I do not even know where to begin as your comment is so full of what if's and maybe's that I'll stick to what I see as opposed to what I "want to see"
Funny stuff though. Especially the falling dollar rising wages part.......
Classic denial
Ciao
MS
Posted by: michael schumacher | Jan 30, 2008 1:12:34 PM
