Connect the Dots

Saturday, November 05, 2005 | 08:34 AM

Alan Abelson’s UP AND DOWN WALL STREET column today in Barron's identifies two economic "dots," but stops just short of drawing the line that connects them.

Since his subtle implication may be a bit understated, we decided to get out our pencils and draw that missing line for him:

Dot one: 3.8% GDP

We have a pretty decent economy, at least if we go by the headlines: "3.8% annualized rise in third-quarter GDP, strong corporate earnings and renewed productivity vigor." However, Abelson warns that:

“We'd be loath to bet too heavily on either the economy or the market. For openers, both are likely to feel the drag from higher interest rates, and there's no reason yet to believe that Mr. Bernanke will be any less resolute in fretting about inflation than Mr. Greenspan. Higher rates are aimed directly at the most inflationary force in the economy -- housing. And, already to some effect, as witness the drop in mortgage applications, the build in the number of new but unsold houses, grudging but palpable give in prices and slackening in the growth of sales.

Housing, moreover, has not only been the single most powerful engine for economic growth but it also, thanks to the ease with which homeowners can turn the equity in their homes into cash, has proved a huge boon to consumer spending. Indeed, without that handy pool of dough, Jane and John Q. would be awfully pressed to indulge their boundless appetite for stuff, since their incomes are increasing much less rapidly than their outlays. And absent any savings, the consumer without being able to dip into the equity in his house or leverage its presumed appreciation would have no recourse but -- perish the thought! -- to cut back.

Even a modest slowdown in consumer spending would have nasty consequences for the economy, and anything more than modest would be all the nastier.

Dot 2:  The state of the US auto industry

El stinko:

The near-lethal combo of surging gasoline prices and plummeting consumer confidence (a 13-year low) did a real number on sales, driving them down to a 14.7 million-unit annual seasonally adjusted rate, from September's 16.3 million (and July's steamy 20.7 million). It didn't help, either, that the companies stopped giving cars away quite as enthusiastically as they had been doing when they were into "incentives."

Incidentally, the weakness in the American Auto industry has been a long time coming: Racer and all around car guy Brock Yates foretold of this in his 1983 book: The Decline and Fall of the American Automobile Industry

Connecting the Dots

I doubt the final read of Q3 GDP --  the prelim number is full of guestimates -- will be 3.8%. But Q4 looks to be much worse. We previously mentioned how Uncle Sam's spending contributed, as well as the GM/Ford giveaway. Let's take a closer look at those auto sales:


graphic courtesy of WSJ


The trend in auto sales is clearly down. Selling autos at cost "pulled forward" sales from later quarters. Anyone on the fence -- buyers, potential buyers, and even marginal prospects -- went out and made their purchases.  After you give something away at cost, it is quite difficult to get people to pay full price again.

But this is kinda like reverse channel stuffing. That means that the fourth quarter may see a much weaker GDP -- on Auto sales weakness alone. If the real estate refi cashout slows, or the consumer wanes, look out.    




Helluva Suit
Barron's MONDAY, NOVEMBER 7, 2005

Auto Sales Fell 14% in October, Hit by Higher Gasoline Prices
THE WALL STREET JOURNAL, November 2, 2005; Page A3

Saturday, November 05, 2005 | 08:34 AM | Permalink | Comments (12) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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As long as the government component in GDP keeps rising all is fine, isn't it?
Any slowdown can simply be prevented by ever more dollars being printed by the Fed, getting borrowed by the Treasury and being spent by the White House, the IOU's happily pickedf up by foreign central banks.
How about starting another war?
The US economy got always lifted out of the doldrums by a war (Korea, Vietnam, Nicaragua, Iraq). As we know from history, economically it makes no difference whether these wars are being lost or won. Kellogg, GE and Halliburton will still see rising revenues.
For unemployment problems the USA should turn to the European model. Everybody attending a training class (2 hours per week are enough) does not get counted as unemployed. Combine the classes with a free meal and save the budget by cutting unemployment deficits, ah benefits...and all brushes ahead of the flat tax will be cleared.
Don't forget to chant "what a wonderful, wonderful world" while enacting these reforms!
For the auto industry all it needs is more tax breaks. Every SUV that can theoretically be used in the war against terror can be written off as long as the government can seize it when in need (Swiss model).
No, these ideas are not intended to land me a consultancy job at the CEA. I will get rich by shorting the dollar a little while after the first 50 bp rate hike Ben Bernanke will employ to establish his reputation as an inflation fighter.

Posted by: The Prudent Investor | Nov 5, 2005 9:38:42 AM

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