Actual GDP: ~0%

Monday, October 30, 2006 | 06:13 AM

Don't pay attention to the statistically aberrant GDP number reported Friday.

Its actually much worse.

Thanks to a "statistical fluke," GDP was actually less than 1%:

"Last quarter's annualized 26 percent increase in auto production shocked Joe Carson, now director of economic research at AllianceBernstein LP in New York. Without the gain, the economy would have grown at an annual rate of 0.9 percent, not the 1.6 percent the Commerce Department reported today.

The increase in output came despite cutbacks announced by General Motors Corp., Ford Motor Co. and others. A drop in the wholesale price of SUVs and light trucks as the automakers cleared leftover 2006 models made production look stronger than it actually was, said Carson. The economic fallout from the auto-industry cutbacks will instead come this quarter, he said."

What brought this aberrational data point about? The number crunchers in the Commerce Department rely on wholesale prices for light trucks. The 5.5% decrease in SUVs had the effect of making output look stronger -- but only when adjusted for inflation. In reality, these were firesales to move product off the lot.

Consider this related tidbit:  AutoNation, the largest dealership and sellers of new cars in the country, said it expects to cut 2007 purchases from the big 3 by 30%.

And its not just cars: WalMart reported its weakest monthly sales gains since December 2000 -- despite the 30 decrease in gasoline prices since the summer. In the US, Sales rose just 0.5% -- significantly below the 2-to-4% improvement originally forecast for October.

Bottom line: If we have to torture the data to get to just 1.6% GDP, imagine what is actually going on in the economy.

This is the primary reason we have "obsessed" so much on Real Estate. Without the massive contribution of residential housing to the overall economy -- from job creation to transactional business to MEW -- there simply is not a whole lot of growth to be found elsewhere.

Other noteworthy items in the Q3 GDP report:  There was an unexpectedly large accumulation of inventories. This implies manufacturing output will slow further in Q4, as manufacturers trim production this quarter to reduce the increased inventory build up.

Also of note:  The GDP Deflator came in at 1.8%, significantly below the expected 2.8%. When it appears we have less inflation, then output looks greater. The deflator has not been below 2% since Q2 2003. In case you were wondering, the deflator is not ex-energy.

For the econ-wonks out there, the Technical notes are always rich with intrigue, and this report is no different:

For many of the key series used to prepare the advance estimate of GDP, including retail sales, unit automobile and truck sales and inventories, manufacturers' shipments of nondefense capital goods (other than aircraft), manufacturers' inventories of durable goods, federal defense spending, and consumer, producer, and international price indexes, actual data are available for all months of the quarter.   

For the key series shown in this table, actual data for the third month of the quarter usually are not available in time for inclusion in the advance GDP estimate. BEA makes assumptions for the source data that are not yet available; assumptions for September 2006 are shown in the last column of the table.  For most series shown, the data for August are preliminary and subject to further revision. Occasionally, the data for earlier months are also subject to revision."                        

This assumptions/estimates is what typically happens for the first GDP release (remember, the number will get reported 3 times: this Advance GDP, Prelim, and then Final). What this could mean is that by the time the subsequent revisions are completed , we could be showing zero growth.

That's right, 0% GDP is in the range of possible Q3 outcomes (I suspect we will be in 0.5%-1% range)


The slow-motion slow-down is now in full swing . . .


UPDATE 2 October 30, 2006 10:24pm

More questions on the deflator; Maybe this will help -- Have a look at the past 5 quarters:

  Q3 '05   Q4 '05    Q1 '06   Q2 '06   Q3 '06
3.3 3.3 3.3 3.3 1.6

Something looks a bit funny in that series . . .


UPDATE October 30, 2006 10:10am

I keep getting emails asking me "What is the GDP Deflator, and why does it matter?"

The short answer is that it is an economic metric that converts output measured at current prices into constant-dollar GDP. The idea is to measure output, not inflation.

For the longer example, lets use an example: Freedonia's biggest product is widgets. In Q1, they sold $100 worth of widgets ; In Q2, they sold $110 worth of widgets, or $10 more.

The trick in calculating Freedonia's GDP is figuring out how much of that  $10 increase is due to increased output, and how much is due to inflation. To oversimplfy, the deflator "deflates" the price increases out of the total, so all that is left is GDP gains. It is the "implicit price deflator for GDP." (Does that clarify this?)


8:30 A.M. EDT, FRIDAY, OCTOBER 27, 2006

U.S. Statistical Fluke Exaggerated Growth, Will Be Reversed
Carlos Torres
Bloomberg, October 27, 2006 14:41 EDT

AutoNation to reduce orders 30%
DETROIT FREE PRESS, October 28, 2006

Wal-Mart Posts Softest Same-Store Sales Since '00
WSJ, October 30, 2006; Page A3

Monday, October 30, 2006 | 06:13 AM | Permalink | Comments (40) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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» Something Looks Out of Place Here from The Stalwart
Barry Ritholtz at The Big Picture unmassages an already weak 1.6% reported GDP number all the way down to nearly zero. Exposed culprits include recent firesales from US automakers plus a very peculiar GDP deflator number used in the calculations [Read More]

Tracked on Nov 1, 2006 1:05:35 PM


Very interesting work Barry. I'll be watching market tells that might confirm your conclusions.

-commercial paper market

-risk spreads


-employment (near full)

-cap ex

-loan quality


Posted by: JGarcia | Oct 30, 2006 8:11:06 AM

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