The Big Picture | Data Analysis

GDP Alternate Measure

Thursday, May 08, 2008 | 01:30 PM

I've been complaining for quite some time that the understated Inflation overstates GDP. John Williams of ShadowStats notes the same thing, and tracks it accordingly:

graphic courtesy of Shadow Government Statistics

This is why its so important to accurately report economic data for policy makers:

In theory, the Fed (looking at that blue line) could have both cut sooner where appropriate and raised rates sooner when signs of inflation became apparent. Instead, they relied on modeled data that was faulty. Hence, our current situation.

UPDATE: May 8, 2008 4:08pm

Angry bear states that SGS' GDP estimates radically understate growth, and I do not totally disagree with his assessment.

The SGS data is an extreme measure of inflation and growth, and I am not suggesting that model is perfect, or even very precise. However, we do know that BLS tends to go the opposite way, understating inflation and overstating growth. Reality likely lies somewhere in between the two -- real GDP growth in the 1980s and 90s, punctuated by the 1990 and 2001 recessions.

I have been arguing that the growth this cycle was significantly inflated. The Economy was reflated with cheap cash and plenty of credit. Hence, the overstatement of growth (and its more of a knock on the Fed Chief at the time than the President.

Thanks, Paul!

Fannie Mae's Home Prices Ex-Foreclosures

Thursday, May 08, 2008 | 06:59 AM

in Corporate Management | Data Analysis | Real Estate

Yesterday morning, we discussed a few fun Fannie Mae (FNM) factoids from their recent quarter and conference call.

Part of that discussion noted that Fannie's CEO sees 7-9% decrease in home prices in 2008 (previous estimate: 5 - 7%).

There's one small rub to that: As Kevin Depew notes at MV, Fannie Mae does not use foreclosed properties in its price index. Thus, FNM significantly understates home price declines.

Let's go to Kevin:

"The fine print at the bottom of the slide is important because it speaks to the use of the case-Shiller index versus Fannie Mae's own index upon which their price projections are based. According to Fannie Mae, because the Case-Shiller index is value-weighted, it places greater weight on higher cost metropolitan areas. Fair enough.

Using the Case-Shiller index methodology, Fannie Mae says its projections would move from a 7-9% home price decline for 2008 to 10-13%, and from 15-19% peak-to-trough to 20-25%. There's just one catch with those projections increases. They strip out the impact of foreclosure sales.

As Fannie Mae observes, "Foreclosure sales tend to depress the S&P/Case Shiller index relative to the Fannie Mae index."

Another awesome new indicator: In addition to Inflation ex-Inflation, we now can add Home prices ex-foreclosures.

Nice!

Source:
Fannie Mae Says: "Not So Fast, Mr. Smarty-Pants Case-Shiller Index Lover"
Kevin Depew
Minyanville, May 06, 2008 12:00 pm
http://www.minyanville.com/articles/fnm-housing-mortgage-economy-pep-ko/index/a/17042

Productivity

Wednesday, May 07, 2008 | 01:30 PM

in Data Analysis | Economy | Wages & Income

While I am having lunch, check out this very cool chart porn on Productivity via Brian Jacobs:

click for ginormous graphic

Recessions Often Begin With Positive GDP Data

Wednesday, May 07, 2008 | 10:45 AM

in Data Analysis | Economy

After the Advanced GDP came out last week at +0.6%, I was surprised to read a variety of commentary about the economy that was factually incorrect. Several pundits and economists had concluded that since GDP was positive, we therefore could not possibly be in a recession.

The meme "Positive GDP = No Recession!" is demonstrably false, as we show in the proceeding pages.

It took only a brief look at historical GDP data to unequivocally prove this to be the case. We used publicly available GDP data from the Bureau of Economic Analysis and from the Federal Reserve Bank of Philadelphia. The dating of recessions was as per the official tables kept by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER).

The data so overwhelmingly proves that Recession can and often do begin with positive GDP, that one suspects the people making opposite arguments must never have actually reviewed any GDP data beyond the most recent headline. I have no other explanation for why so many people got this so wrong.

Before we go to the actual data, briefly consider just what a recession is. As formally defined by the NBER, it is the "Peak to Trough decrease in business activity" during an economic cycle. The peak marks the end of the expansion phase and the beginning of a recession. During the other phase of the cycle, between trough and peak, the economy is in an expansion. This is described as the economy's "normal state."

Given that the NBER dates the beginning of a Recession from the economic peak in business activity, one would expect that GDP during that quarter would be mostly positive -- not negative. And in fact, that is what the historical data often shows.

>
1. Many Recessions begin with a Positive GDP

Let's look at a the beginning of several post-WWII recessions:

• The 1980 contraction was officially dated from January 1980 through July 1980. GDP for the first quarter of 1980 was +1.09%. This contraction lasted only 6 months.

Note the 1980-82 period can be called a "double dip recession, with the next contraction beginning exactly 12 months later -- July 1981 -- and running another 16 months to November 1982.

• The deeper 1973 recession ran for 16 months, from November 1973 - March 1975. That first quarter GDP was a positive +1.34%.

• The 1957 recession began with a GDP reading of +1.78%. It ended 8 months later in April 1958.

• GDP in the fourth quarter of 1948 was +3.61%. That 11 month recession was dated from November 1948 to October 1949.

• Lastly, its also worth noting that the 1960 and 1969 recessions began almost flat -- they had a marginally negative GDP number of -0.05% and -0.33% respectively.

Hence, the historical data shows that recessions do not always begin with negative GDP numbers,. Of the 11 post WWII recessions, 4 started with positive numbers, two were flattish.

1980:01 1.09%
1973:04 1.34%
1957:03 1.78%
1948:04 3.61%

1969:04 -0.05%
1960:02 -0.33%

Leading Quarter of 6 Post WWII Recessions, GDP

Data source Bureau of Economic Analysis, Federal Reserve Bank of Philadelphia
>
(Note: I will update this chart with the 1969 recession)

Continue reading "Recessions Often Begin With Positive GDP Data"

Feldstein: U.S. 'Sliding' Into Recession

Wednesday, May 07, 2008 | 03:30 AM

in Data Analysis | Economy | Video

Great piece by Martin Feldstein in the FT: Misleading growth statistics give false comfort

Click for Video

Bloomberg:

"Harvard University economist Martin Feldstein, a member of the committee that charts the American business cycle, said the U.S. economy is ``sliding into a recession.''

"This is a weakening economy,'' Feldstein, president of the National Bureau of Economic Research, said in a Bloomberg Television interview in New York. ``If you compare where the economy is now, with where it began at the beginning of the year, just about every indicator is down.''

The comments by Feldstein, a Republican, go farther than anyone in the Bush administration has gone in publicly characterizing the severity of the U.S. slowdown. Treasury Secretary Henry Paulson in an interview last week said the economy is ``still growing, albeit modestly.''

Sources:

Misleading growth statistics give false comfort
Martin Feldstein
FT, May 7 2008 18:54
http://www.ft.com/cms/s/0/4ae9ee60-1c36-11dd-8bfc-000077b07658.html

Feldstein Says U.S. Economy `Sliding' Into Recession
Anthony Massucci and Kathleen Hays
Bloomberg, May 6 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aLkqZ.fSIOdY&

Recession Probabilities for the United States

Tuesday, May 06, 2008 | 11:30 AM

in Data Analysis | Economy | Employment | Technical Analysis

Jeremy Piger is an Assistant Professor of Economics at the University of Oregon. He has put together a model that presents recession probabilities for the United States "obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income (excluding transfer payments), and real manufacturing & trade sales.

It is a simple but robust model with a good track record of providing a modest advanced warning of recessions. Its updated quarterly.

Here is the prior Recession Probabilities for the United States. Note that this model gave a short warning prior to actual recessions beginning:

Historical U.S. Recession Probabilities June 1967 – February 2008

Graph courtesy of Jeremy Piger

>

Note: The main weakness in the model is the reliance on government data (which tends to be revised downwards eventually. See this chart of NFP vs B/D as an example.

Challenge for Economists: Positive GDP Recessions

Tuesday, May 06, 2008 | 10:01 AM

in Data Analysis | Economy | Financial Press

Several economists and pundits have unequivocally stated that, since there have been no negative quarters of GDP, there is no Recession.

This group of economic observers include former CEA Chair and current Harvard Prof Greg Mankiw, economist Brian Wesbury, economist/media pundit Larry Kudlow, and USNews reporter James Pethokoukis -- amongst a few others.

Here's my challenge for both BP readers and these economic observers:

Has there ever been a recession declared by the NBER, even where there was not 2 consecutive quarters of negative GDP?

Have there been past recessions where GDP was originally reported as a positive number?

>

Readers can post their answers below.

I will post the definitive answer to this in 24 hours.

NFP Roundup

Monday, May 05, 2008 | 09:00 AM

in Data Analysis | Employment | Weblogs

If you missed any of our payroll coverage on Friday and Saturday, here's a full roundup:

Bracing for NFP Day
http://bigpicture.typepad.com/comments/2008/05/bracing-for-nfp.html
Once more unto the breach

Reviewing the NFP Data
http://bigpicture.typepad.com/comments/2008/05/reviewing-the-n.html

Job Loss Trend Dismal
http://bigpicture.typepad.com/comments/2008/05/job-loss-trend.html
Gail Dudack's Research Group

NFP Minus Birth Death Adjustments http://bigpicture.typepad.com/comments/2008/05/nfp-minus-birth.html

NonSeasonally Adjusted Data?
http://bigpicture.typepad.com/comments/2008/05/nonseasonally-a.html

Visualizing Information: Taking Apart CPI Inflation

Sunday, May 04, 2008 | 11:55 AM

in Data Analysis | Inflation

Excellent Sunday morning chart porn in the Business section of today's NYT, regarding the various components of CPI inflation measures:

click for interactive chart

Each month, the Bureau of Labor Statistics gathers 84,000 prices in about 200 categories — like gasoline, bananas, dresses and garbage collection — to form the Consumer Price Index, one measure of inflation. It’s among the statistics that the Federal Reserve considered when it cut interest rates on Wednesday. The categories are weighted according to an estimate of what the average American spends.

Source:
All of Inflation’s Little Parts
Amanda Cox
The New York Times, May 3, 2008 http://www.nytimes.com/interactive/2008/05/03/business/20080403_SPENDING_GRAPHIC.html

NonSeasonally Adjusted Data?

Saturday, May 03, 2008 | 06:00 PM

in Data Analysis | Employment

In the comments of an earlier post, Roman asks "If you are going to not consider the birth/death adjustment, then its only fair to not count the seasonal adjustment. If you take that out, then the report shows a large gain of jobs. Why does no one here want to talk about that?"

Okay, its a question we might as well address (those of you with statistics or applied mathematics backgrounds please bear with us).

I criticize the B/D model because it has changed what was primarily a measured count (via tax withholding data at established firms) into something more theoretically based. Hence, what was once actual measurement is now primarily a form of modeling. We know that at this late stage of the economic cycle, the modeling creates these bizarre aberrations, such as +45,000 new construction jobs and +8,000 new financial activities jobs in April 2008.

Those data points aren't merely wrong, they are patently absurd.

But what of seasonal adjustments? What they do is attempt to smooth out or reduce the effect of the regular seasonal patterns that tell us nothing about the economy, and everything about calendar effects: winter weather, school years, planting seasons, holidays, etc.

But since you asked . . .

Let's do a month-to-month comparison of the non-seasonally adjusted data:

From the CES establishment data, table B-1,we learn that the 2008 numbers were 137,019 in March and in 137,722 in April, for a total nonseasonal adjusted change of +703k. Last year, in 2007, the March was 136,835 versus April 137,668, for nonseasonal adjusted change of +833,000.

So before seasonal adjustments, April 2008 created 130,000 less jobs than April 2007.

Here's a graphic depiction of the year over year, non-seasonally adjusted NFP:

Chart courtesy of Brian Jacobs

For those of you wonky enough to care, here is the BLS' explanation as to their Seasonal adjustments:

Over the course of a year, the size of the nation's labor force and the levels of employment and unemployment undergo sharp fluctuations due to such seasonal events as changes in weather, reduced or expanded production, harvests, major holidays, and the opening and closing of schools. The effect of such seasonal variation can be very large; seasonal fluctuations may account for as much as 95 percent of the month-to-month changes in unemployment. (emphasis added)

That's a rather substantial seasonal impact. What do you suppose we should do about it?

Because these seasonal events follow a more or less regular pattern each year, their influence on statistical trends can be eliminated by adjusting the statistics from month to month. These adjustments make non-seasonal developments, such as declines in economic activity or increases in the participation of women in the labor force, easier to spot. For example, the large number of youth entering the labor force each June is likely to obscure any other changes that have taken place relative to May, making it difficult to determine if the level of economic activity has risen or declined. However, because the effect of students finishing school in previous years is known, the statistics for the current year can be adjusted to allow for a comparable change.

Insofar as the seasonal adjustment is made correctly, the adjusted figure provides a more useful tool with which to analyze changes in economic activity . . ." (emphasis added)

Now you know . . . Aren't you glad you asked?

Sources:
EMPLOYMENT SITUATION: APRIL 2007
Table B-1 Employees on nonfarm payrolls by industry sector and selected industry detail
BLS,
http://www.bls.gov/news.release/History/empsit_05042007.txt

Employees on nonfarm payrolls by industry sector and selected industry detail CURRENT
BLS, Table B-1.
http://www.bls.gov/news.release/empsit.t14.htm

Abelson Awards Pulitzer Prize for Fiction to BLS

Saturday, May 03, 2008 | 11:30 AM

in Data Analysis | Economy | Employment

In Barron's this week, Alan Abelson laces into BLS on the NFP data:

"We're talking instead about something much more important, namely, who'll get the Pulitzer Prize for Fiction. The winner hands down, we fearlessly forecast, will be that brilliant narrative confected by, of all people, the Bureau of Labor Statistics, and published just last Friday under the deceptively bland title "The Employment Situation: April 2008." Although we're loath to deprive you of even a modicum of the thrill of devouring this marvelous work of magic realism by revealing too much of its contents, rest assured it's carefully designed to leave you with a comfy feeling in these rather trying times.

No doubt you've already gleaned the beaming news that instead of the 75,000-80,000 or even greater job losses and higher unemployment rate that the soothsayers were prognosticating, payrolls last month were trimmed by a much more modest 20,000, and the unemployment rate dipped to 5%, from 5.1%. Hallelujah! It's such a happy contrast to those nasty expectations and to the 81,000 jobs that vanished in March.

What makes the report all the more extraordinary is that it comes in the face of otherwise dismal dispatches from the employment front. Layoffs last month, according to Challenger Gray & Christmas, the placement firm, tallied 90,015, a hefty 68% greater than in March. New claims for unemployment insurance in the last full week in April rose to 380,000, from 345,000 the week before, while continuing claims topped the three million mark. Monster, the online want-ad outfit, reported a 6% drop in its April index compared with the same month a year ago, and the Conference Board's help-wanted index sagged to a new low while its measure of employment opportunities showed, not surprisingly, jobs are ever-harder to come by.

The BLS report, then, was like a burst of sunshine dispelling the gloom. So we take this occasion to tip our hat to the bureau's artistry in being able to fashion a comparatively heartening picture of the job market out of some very unpromising raw material. The populace, as recent soundings make clear, is plenty uneasy and disgruntled about the stumbling economy, feeling the pinch and worried about a paycheck; so anything that can provide a lift to sagging spirits is more than welcome.

Actually, the praise really belongs to the unknown (at least to us) and certainly unsung numbers-bender who crafted the so-called birth/death adjustment, supposedly created to capture the additional jobs of firms too new to be captured by the survey. As it has demonstrated time and again, it's much more a product of the imagination than of dull data, as, of course, any worthwhile work of fiction is.

We have on occasion pointed out the contribution the birth/death adjustment has made to the payroll total, but we have trouble remembering when the additional slots it conjured up were anywhere near as massive as they were in the April reckoning, when it "generated" 267,000 jobs. Put another way, ex the adjustment, last month's job loss would have ballooned to 287,000. Bit of a difference, eh?

Just one illustration points up the, shall we say, peculiarity of what the BLS adjustment has wrought. According to the birth/death model, 8,000 jobs were added in April -- are you sitting down? -- in the financial sector. Which, we assume, will come as a stunning surprise to the gosh knows how many poor souls who have been laid off by the banks, the brokerage houses and the rest of the not-very-robust financial fraternity. Must be something really wrong with our vision, moreover, since new firms in that sector appear to be conspicuous by their absence.

As Philippa Dunne and Doug Henwood, the very bright bulbs who run The Liscio Report, point out -- though they usually view the birth/death model more kindly than we do -- among the stranger additions made via its agency in the April report was the 45,000 to construction jobs. (In case you've been vacationing on the moon, construction is not exactly booming.)

They also suggest that the 83,000 new slots supposedly created in the leisure and hospitality field is definitely suspect. "With vacation plans at near-record lows and restaurants reporting reduced traffic," they feel many of these supposed job gains could simply disappear come the next benchmark revision.

After reviewing the defects in the household version of last month's employment trends, Philippa and Doug warn, "given all its internal blemishes," it would be wrong to conclude from the April report that the economy and the job market are stabilizing. And they caution, "An economy providing lots of part-time jobs to the young and few full-time jobs to the prime-aged" is an economy that could have a tough time "sustaining life."

That's longer than I usually like to excerpt -- and we've hit on many of the same themes -- but it is simply too perfect not to reproduce all of the relevant sections.

Source:
Work of Art
Alan Abelson
Barron's May 5, 2008
UP AND DOWN WALL STREET
http://online.barrons.com/article/SB120976876451563873.html

NFP Minus Birth Death Adjustments

Friday, May 02, 2008 | 01:26 PM

in Data Analysis | Employment | Technical Analysis

Via the miracle of Bloomberg, we can back out of the NFP data the B/D adjustment

By that metric, today's number was actually very weak compared to other Payroll numbers

Note: As previously mentioned, the B/D is not a one for one additor to the NFP data. It goes into the total employment data, which is then seasonally adjusted, before a monthly gain/loss is made.

The greater impact of B/D is on the total annual jobs created, and not the monthly numbers.

Thanks, Pete!

Job Loss Trend Dismal

Friday, May 02, 2008 | 11:45 AM

in Data Analysis | Employment | Technical Analysis

Today's chart porn will be the second to last of our Employment related posts:

Gail Dudack's Research Group was kind enough to give us permission to run this chart she created back in April of this year (its subscription only, and hence a month delayed).

She notes that "Job losses in construction, manufacturing, trade-transportation & utilities, professional & business services, financial activities and information technology are overwhelming the gains seen in education & health services, government, leisure & hospitality, mining and other services."

Even worse, 2008 measure up very poorly with any of the prior 7 years:

Comparison With Recent Years Is Less Than Encouraging For 2008

Source: Dudack Research Group, April 11, 2008

Note: the title of this post is not mine -- it came from the original version of this published at Welling@Weedon . . .

Reviewing the NFP Data

Friday, May 02, 2008 | 09:58 AM

in Data Analysis | Employment

Courtesy CNBC

Fist off, the numbers: BLS reported Payroll employment dropped 20,000, far below the consensus estimates. Unemployment fell to 5.0%.

If you believe the headline numbers are an accurate reflection of the current US employment situation, then you can stop reading this, and head over to this article. Everyone else should feel free to keep reading.

Let's consider a few items:

• Private payrolls have fallen for five straight months. Weakness in the goods-producing sector is intensifying;

• Employees working part time jobs is +306k this month to 5.2 million. This increase is either because a) Hours have been curtailed; or B)They cannot find full-time employment. Note that if your hours get cut back, you do not show up in the Unemployment Rate or any layoff data.

• As noted earlier, the Birth/Death model was a major distortion. (in several months, we will get the revisions). Lets look at how the B/D has changed from April 2007 (+262) to April 2008 (+267):

+45k construction jobs v 37k April 2007
+8k jobs were added in financial activities versus 1k last April.
+72k in professional/business services versus 48k last April.
+83k in leisure/hospitality (95k last April).

I am certain that some country on some planet in our galaxy is adding more jobs in construction and finance versus one year ago, but it ain't the USA on planet Earth, that's for sure.

Remember, the B/D adjustment is not a one for one addition, it goes into the total employment measure (not just the increase) then gets seasonally adjusted.

• The primary payroll improvement was in the service-providing sector. Ian Shepherdson of High Frequency Economics suggests this is noise, as the the seasonal factor was 81,000 bigger than in April 07. (Easter seasonal problems?)

• The overall trend is increasing weakness in job creation.

UPDATE: May 2, 2008 10:38

A brief explanation of the B/D adjustment: The changes in the Birth Death model were designed to capture new job creation that BLS was missing at the early stages of a recovery. However, the improvements in accuracy at that part of the cycle seem to be wildly offset by a decrease in accuracy in the latter parts of the cycle -- i.e., early turns in employment pre-recession.

Sources:
Employment Situation Summary
THE EMPLOYMENT SITUATION: APRIL 2008
http://www.bls.gov/news.release/empsit.nr0.htm
Download April_2008.pdf

CES Net Birth/Death Model
http://www.bls.gov/web/cesbd.htm

Bracing for NFP Day

Friday, May 02, 2008 | 07:23 AM

in Data Analysis | Economy | Employment | Wages & Income

Once more unto the breach, dear friends, once more:

The monthly NonFarm Payroll report rolls out today, and the consensus is none too cheerful: Median estimates of 82 economists surveyed by Bloomberg for April 2008 is for a job loss of -75,000 (Dow Jones had -85,000). Estimates ranged from -150,000 to -18,000. None of the economists surveyed had a positive estimate.

Imagine that: +5,000 is a huge upside surprise.

Let's review the data points leading to NFP, starting with the positive arguments:

• According to Greg Mankiw there is no recession. Brian Wesbury agrees.

• James Pethokoukis went even further: "Out: Recession. In: Expansion."

• Today's WSJ notes: "In the past 10 business cycles, year-over-year growth in payrolls has averaged 3% in the 12 months leading up to a recession. Twelve months before payrolls peaked this time around, job growth averaged just 1.5%. That could mean there's not a lot of payroll fat to be trimmed in this downturn. It could explain why weekly claims for unemployment benefits still haven't climbed to 400,000, the level associated with recessions."

• ADP employment report shows addition of 10,000 jobs in April.

Hey, that's not too awful sounding -- why are the economists so negative? Let's consider a few reasons:

• ADP forecast a gain of 10,000 this month. How is that a negative? ADP has significantly understated job losses over the past 5 months. Their overestimates of private payrolls averaged +117,000. So if ADP remains consistent, a triple digit loss is a distinct possibility.

• Jobless claims data were 380,000 (April 26th week) -- these are levels consistent with large payroll losses. Also, continuing claims backlog surged 74,000 to new highs (3.019 million). I expect we will see 5.5% unemployment rate by Labor Day.

• BLS has been adding Business Birth/Death estimate jobs at a rate equal to or greater than 2007 rates -- a worrisome sign.

• Recent sentiment surveys -- University of Michigan sentiment index surrounding the job market outlook was at the worst level since January 1991. The Conference Board perceptions over the labor market deteriorated markedly in April; their ‘jobs-are-plentiful’ index printed its lowest level in nearly three years.

• Challenger layoffs were 90,015 in April -- a 68% increase from March, and up 27% Year over year, toa 19 month high.

• Manpower hiring index sank in 2Q to 14 from 17 in the first quarter and 18 a year ago. This was the softest result in four years. Merrill Lynch's David Rosenberg points out that "a 14-ish number in the past has often coincided with recession and deepening job losses – 2001Q3, 1990Q3, 1981Q1 just to name a few."

Bottom line: A positive number would be a huge surprise; a 6 figure loss is a small but distinct possibility . . .

Sources:
Job Cuts May Not Get Too Deep
MARK GONGLOFF
WSJ, May 2, 2008
http://online.wsj.com/article/SB120968657093061245.html

The ADP National Employment Report
April, 2008
http://www.adpemploymentreport.com/pdf/FINAL_Report_Apr_08.pdf

Manpower Employment Outlook Survey
Q2 2008, United States
http://tinyurl.com/6nzemt

GDP Charts

Thursday, May 01, 2008 | 08:45 AM

in Data Analysis | Economy

Brian Jacobs sends us these great GDP charts (below), along with this overview:

What was Up in the GDP data:

• Imports (oil)

• Exports (worth less to be worthless dollar)

• Government spending (national defense up 6% - Iraq war?)

What was Down in the GDP data:

• Personal consumption (besides services which are likely required - i.e. day care)

• Private investment down BIG across the board

And this cool GDP chart porn:

Great charts -- thanks Brian!

Worldwide Fertilizer Usage

Wednesday, April 30, 2008 | 01:30 PM

in Commodities | Data Analysis

Speaking of inflation driven food prices: Here's a little infoporn for anyone who followed us into Mosaic (MOS) or trade in Potash (POT) or others:

click for ginormous map

Source:
Shortages Threaten Farmers’ Key Tool: Fertilizer
KEITH BRADSHER and ANDREW MARTIN
NYT April 30, 2008
http://www.nytimes.com/2008/04/30/business/worldbusiness/30fertilizer.html

Congratulations! Its a Recession!

Wednesday, April 30, 2008 | 09:49 AM

in Data Analysis | Economy | Inflation

It doesn't take too much advanced mathematics to note that by several historical methods for determining whether the economy is contracting or expanding, we are now in a recession.

Consider a true inflation measure of GDP, per capita measure, or the NBER methodology. All three show economic contraction.

Let's start with our "Reality-based" analysis:

The only conclusion an honest read of inflation produces is that both Q4 2007 and Q1 2008 were positive in nominal terms, but negative in Real terms. Remember, the goal of GDP should be to figure out how much the economy is expanding or contracting -- not how much prices rose.

By any honest measure of inflation -- and not the 3.5% BEA price index for gross domestic purchases -- both of the past two quarters would have been negative. How can we have an understated inflation rate of 4%, and a GDP Price Deflator of just 2.6%?

2) The NBER methodology: The 2 consecutive quarters of GDP contraction is not the only metric for identifying recessions. According to the econo-geeks at the National Bureau of Economic Research, a recession is defined as a "significant decline in economic activity spread across the economy, lasting more than a few months."

Here's their specific language:

"Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology."

Hence, if we follow what the people who actually determine what is and isn't a recession say abnout the matter, and not just limit our analysis to GDP, then its pretty clear we are now experiencing an economic contraction.

Rex Nutting reminds us that 1) After-tax inflation adjusted incomes have been stagnant since September; inflation-adjusted sales have fallen at a 5.2% annual pace in the past three months, and are essentially unchanged from six months ago; industrial output has stalled;

UPDATE: Rex adds that spending on services rose 3.4%, including a 14% rise in real spending (seasonally adjusted) on household heating. It’s quite likely that this figure doesn’t accurately adjust for the rising cost of natural gas and heating oil this year. About one-third of the total increase in GDP ($17.4 billion) was an increase in the spending on heating costs ($5.5 billion). Hence, even more Inflation-driven GDP.

By any reasonable measure of the NBER delineated metrics, we are already in a recession.

3) Per Capita Measure, favored by Merrill Lynch North American Chief Economist David Rosenberg, is to simply look to see if the economy is expanding faster than the population. With the US population expanding by 1.0 - 1.5% per year, it takes economic growth of at least that merely to stay in place. Hence, Rosenberg's claim that GDP growth on a per capita basis is actually are contracting sine Q4 2007.

Previously:
Merrill Lynch: Per Capita Recession Began in Q4 (April 2008) http://bigpicture.typepad.com/comments/2008/04/merrill-lynch-p.html

GDP, Inflation & Recession
http://bigpicture.typepad.com/comments/2008/04/gdp-inflation-r.html

Sources:
GROSS DOMESTIC PRODUCT: FIRST QUARTER 2008 (ADVANCE)
APRIL 30, 2008
http://www.bea.gov/newsreleases/national/gdp/2008/pdf/gdp108a.pdf

Business Cycle Dating Committee, National Bureau of Economic Research
NBER, January 7, 2008
http://www.nber.org/cycles/jan08bcdc_memo.html

Global Inflation Continues to Accelerate
Phil Izzo
Economics Blog, April 29, 2008, 11:30 am
http://blogs.wsj.com/economics/2008/04/29/global-inflation-continues-to-accelerate/

U.S. could have recession without drop in GDP
Analysis: Growth isn't everything; jobs and incomes count more
Rex Nutting
MarketWatch, 8:50 a.m. EDT April 30, 2008
http://tinyurl.com/4cab83

GDP is . . . 0.6%

Wednesday, April 30, 2008 | 08:29 AM

in Data Analysis | Economy

I will be out of pocket when GDP gets released, so feel free to go to the official BEA release; use the comments below to update/discuss the actual GDP data points.

A few things to look for beyond the actual number: Corporate profits, PCE, and seasonal adjustments.

~~~

UPDATE: April 30, 2008 9:47am

If we ignore the real (inflation adjusted) factor, as we delve deeper into the data, we see that Q1 spending (personal consumption expenditures) rose just 1.0% versus 2.3% in Q4. This matches Q2 2001's gains.

How did the rest of the numbers look?

GDP increased 3.2% to an annualized $14.19 trillion (in current dollars);
Gross private domestic investment was down -0.7%;
Business fixed investment: -2.5%.
Residential investment data actually accelerated downwards; the number -26.7% was the biggest drop since 1981. (who keeps calling those Real Estate bottoms?)
Purchases of durable goods fell 6.1%
Q1 non-durables spending dropped 1.3%.
Business spending fell by 2.5%.
Investment in structures went down 6.2%.
Equipment and software outlays decreased 0.7%.

The Final sales of domestic product (GDP less change in private inventories) fell 0.2%; final domestic sales (gross domestic product, excluding additions to stocks and international trade) dropped 0.4%. THIS WAS THE FIRST DECLINE SINCE THE 1991 RECESSION.

A few positives: First-quarter spending rose 1.0%, Services gained 3.4% and exports rose by 5.5%. While local governments are struggling, Uncle Sam remains profligate: Federal Government consumptions were +4.6% versus State and Local Govt: +0.5%.

Also helping to keep nominal GDP in the green: Inventory builds. They rose slightly for the quarter by $1.8B, versus going down $18.3 billion in Q4. That contributed 0.81% to Q1 GDP, and without it, the Q would have been negative.

courtesy of Barron's Econoday

Previously:

GDP, Inflation & Recession
http://bigpicture.typepad.com/comments/2008/04/gdp-inflation-r.html

Source:
GROSS DOMESTIC PRODUCT: FIRST QUARTER 2008
GDP, April 30, 2008
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

GDP, Inflation & Recession

Wednesday, April 30, 2008 | 07:10 AM

in Data Analysis | Economy | Inflation

Why do I spend as much time as I do debunking inflation, employment and housing data? Today, you will see precisely why.

At 8:30am, we get the advance GDP data from BEA. Consensus is for a marginally positive data point -- 0.3%. This will follow Q7 2007 of 0.6%.

In terms of debunking the misleading data stats, today is the day where the rubber meets the road. Why? Well, if the official inflation data was reported in a way that was more reflective of reality, Q4 last year would likely have been anywhere from 0.75% to 1.5% lower (if not more), sending it into negative territory.

The same will be true for today's GD data point, with the probable overstatement enough to keep it marginally positive or flat.

Why does inflation matter so much to GDP? Gross Domestic Product (GDP) is the "broadest measure of aggregate economic activity and encompasses every sector of the economy." If you want to know understand how weak or strong an economy is, GDP is where you begin. But, you need to determine how much of GDP is nominal, and how much is real (i.e., after inflation growth).

Consider an economy that sold $100 worth of goods and services in one quarter. The next Q, it produced $110 worth. When determining the GDP of this economy, you want to know how much of those gains was additional output, and how much merely price increases. Its usually a combination of more widgets and higher prices, so if you want to know exactly how much the economy expanded, you need to know exactly how much inflation there was. Understate inflation, and you overstate growth.

If today's GDP is marginally positive, following Q4's marginally positive GDP data, then we officially will not be in a recession by the classic "2 consecutive quarters of negative GDP growth." This means that if the correct inflation deflator was built into GDP, we would have our two consec quarters.

Hence, for the reality based community, the recession will be officially here.

Of course, if you believe that actual inflation is running about 2.5%, then you should feel free to ignore this analysis.

Home Prices Fall 12.7%

Tuesday, April 29, 2008 | 10:06 AM

in Data Analysis | Real Estate

Declines in the prices of existing single family homes across the United States worsened in February 2008, with 17 of the 20 now reporting record low annual declines -- 10 of the 20 regions were in
double-digits:

"There is no sign of a bottom in the numbers. Prices of single family homes continue to drop across the nation. All 20 metro areas were in the red for the February-over-January reading. In addition, 19 of the 20 MSAs are still reporting negative annual returns. The monthly data show that every one of the MSAs has now declined" --David M. Blitzer, Chairman of the Index Committee at Standard & Poor's.

S&P/Case-Shiller Home Price Indices

Chart courtesy of S&P

S&P/Case-Shiller Index - February 2008 Table Sp_caseshiller_index_february_200_2

Table courtesy of TFS Derivatives

UPDATE: April 29 2008 11:58am