The US GDP Report

One picture is worth a thousand words...

Buffaloed Tim and Howdy Bernanke

The Great Recession in the US Is Worse Than We Were Previously Told

With all the hoo-hah over the deficit fandango, relatively little attention was paid to the latest GDP number and the prior revisions to growth.

The US needs to get serious about jobs creation and median wage growth. Austerity does not facilitate growth, despite the corporatist spin to the contrary.

The problem with the first stimulus package was that it was too heavily weighted to tax cuts and efforts to promote consumption, and not programs to stimulate domestic jobs growth.

Cutting taxes, including capital gains taxes, does not promote growth. Reducing government in and of itself does not promote growth. These are fallacies that continue to hurt the country.

To accomplish its goals, the US must prioritize its spending away from financial and military adventurism, and let go of the false theories of efficient markets and trickle down growth.

That will be difficult given the current structure of the country's leadership and the embedded nature of its crony capitalism.

Consumer Metrics Institute
Lakewood, Colorado
July 29, 2011

BEA Reports 1Q-2011 and "Great Recession" Far Worse Than We Were Previously Told

Included in the BEA's first ("Advance") estimate of second quarter 2011 GDP were significant downward revisions to previously published data, some of it dating back to 2003. Astonishingly, the BEA even substantially cut their annualized GDP growth rate for the quarter that they "finalized" just 35 days ago -- from an already disappointing 1.92% to only 0.36%, lopping over 81% off of the month-old published growth rate before the ink had completely dried on the "final" in their headline number. And as bad as the reduced 0.36% total annualized GDP growth was, the "Real Final Sales of Domestic Product" for the first quarter of 2011 was even lower, at a microscopic 0.04%.

And the revisions to the worst quarters of the "Great Recession" were even more depressing, with 4Q-2008 pushed down an additional 2.12% to an annualized "growth" rate of -8.90%. The first quarter of 2009 was similarly downgraded, dropping another 1.78% to a devilishly low -6.66% "growth" rate. And the cumulative decline from 4Q-2007 "peak" to 2Q-2009 "trough" in real GDP was revised downward nearly 50 basis points to -5.14%, now officially over halfway to the technical definition of a full fledged depression.

One of the consequences of the above revisions to history is that the BEA headline "Advance" estimate of second quarter GDP annualized growth rate (1.29%) is magically some 0.93% higher than the freshly re-minted growth rate for the first quarter. From a headline perspective, that makes for a far better report than the 0.63% drop from the previously published 1Q-2011 number -- since otherwise the new 2Q-2011 numbers would be showing an ongoing weakening of the economy.

Unfortunately, meaningful quarter-to-quarter comparisons are nearly impossible in light of the moving target provided by the revisions. But among the notable items are:

-- Aggregate consumer expenditures for goods was contracting during the second quarter, with annualized demand for durable goods dropping 4.4% during the quarter -- into the ballpark of the numbers we have measured here at the Consumer Metrics Institute. This decline was enough to shave 0.35% off of the overall GDP (with just automotive goods removing 0.65% from the annualized GDP growth rate).

-- The drag on the GDP from governmental cutbacks purportedly moderated by a full percent, improving to a -0.23% drag from a revised -1.23% impact in the first quarter. This reversal may be the result of either the waning effect of expiring stimuli or overly optimistic BEA "place-holders" while more data gets collected. Many state and local public sector employees would be shocked to learn that real-world governmental downsizing has moderated.

-- Net foreign trade added 0.58% to the GDP growth rate after subtracting 0.34% during 1Q-2011 (a 0.92% positive swing) -- all in spite of oil prices reaching recent peaks at the end of April. Anomalies in imports caused by tsunami suppressed trade with Japan may have been the culprit here, since the growth rate in exports (and their contribution to the overall GDP growth) actually dropped quarter-over-quarter. Imports reportedly pulled overall GDP down by only 0.23%, after subtracting 1.35% from the revised figures for the prior quarter.

-- Commercial Fixed Investments contributed 0.69% (over half) of the reported annualized growth, up over 50 basis points from the revised contribution for the first quarter. Inventory building contributed an additional 0.18% to the growth rate, although that number is only about half of the boost provided in the revised 1Q-2011 data. These are the only two really positive signs for the economy contained in the report.

-- Working backwards from the data, the BEA effectively used an aggregate annualized inflation rate of somewhere near 2.39% to "deflate" their top-line total nominal data into the "real" data used for their headline numbers. This was after raising the aggregate deflater effectively used for the first quarter to somewhere near an annualized 2.72% rate -- indicating that the BEA believes that (for the purposes of their headline number) inflation moderated somewhat during the second quarter. They wrote in their July 29 press release that:

"The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.2 percent in the second quarter, compared with an increase of 4.0 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 2.6 percent in the second quarter, compared with an increase of 2.4 percent in the first."

We understand that the aggregate "deflater" has to use numbers appropriate to the individual line items being deflated, including producer price inflation data and foreign exchange inflation rates (although 2.39% might be modest for most of those as well). But if the unadjusted trailing 12 month price changes in CPI-U (3.6%) recorded by the Bureau of Labor Statistics (the official source of U.S. Government inflation data) is used to "deflate" the nominal data, the actual "real" growth rate for the second quarter drops to 0.011% (slightly over 1 basis point), which the BEA would normally round to zero. It is likely that the entire reported growth rate for the second quarter is actually an artifact of under-recognized systemic inflation.

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The Numbers (as Revised)

As a quick reminder, the classic definition of the GDP can be summarized with the following equation:



GDP = private consumption + gross private investment + government spending + (exports − imports)

or, as it is commonly expressed in algebraic shorthand:


GDP = C + I + G + (X-M)

For the first quarter of 2011 the values for that equation (total dollars, percentage of the total GDP, and contribution to the final percentage growth number) are as follows:

GDP Components Table

	Total GDP	=	C	+	I	+	G	+	(X-M)
Annual $ (trillions)	$15.0	=	$10.7	+	$1.9	+	$3.0	+	$-0.6
% of GDP	100.0%	=	71.0%	+	12.7%	+	20.2%	+	-3.9%
Contribution to GDP Growth %	1.29%	=	0.07%	+	0.87%	+	-0.23%	+	0.58%

The quarter-to-quarter changes in the contributions that various components make to the overall GDP can be best understood from the table below, which breaks out the component contributions in more detail and over time. In the table we have split the "C" component into goods and services, split the "I" component into fixed investment and inventories, separated exports from imports, added a line for the BEA's "Real Finals Sales of Domestic Product" and listed the quarters in columns with the most current to the left (please note that nearly all of the numbers below for earlier quarters are changed from our previous commentary tables):

Quarterly Changes in % Contributions to GDP

	2Q-2011	1Q-2011	4Q-2010	3Q-2010	2Q-2010	1Q-2010	4Q-2009	3Q-2009	2Q-2009	1Q-2009
Total GDP Growth	1.29%	0.36%	2.36%	2.50%	3.79%	3.94%	3.81%	1.69%	-0.69%	-6.66%
Consumer Goods	-0.33%	1.10%	1.87%	1.09%	0.87%	1.45%	0.12%	1.70%	-0.52%	0.05%
Consumer Services	0.40%	0.36%	0.61%	0.75%	1.18%	0.47%	0.21%	-0.04%	-0.76%	-1.07%
Fixed Investment	0.69%	0.15%	0.88%	0.28%	2.12%	0.15%	-0.42%	0.13%	-2.26%	-5.09%
Inventories	0.18%	0.32%	-1.79%	0.86%	0.79%	3.10%	3.93%	0.21%	-0.58%	-2.66%
Government	-0.23%	-1.23%	-0.58%	0.20%	0.77%	-0.26%	-0.18%	0.28%	1.21%	-0.33%
Exports	0.81%	1.01%	0.98%	1.21%	1.19%	0.86%	2.51%	1.49%	-0.02%	-3.82%
Imports	-0.23%	-1.35%	0.39%	-1.89%	-3.13%	-1.83%	-2.36%	-2.08%	2.24%	6.26%
Real Final Sales	1.11%	0.04%	4.15%	1.64%	3.00%	0.84%	-0.12%	1.48%	-0.11%	-4.00%

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Summary

For the most part the "Advance" GDP report for the second quarter is positive only in comparison to newly re-worked numbers for the first quarter:

-- The good news is that commercial investment appears to be improving and inventories are no longer growing at the previously unsustainable rate.

-- But the bad news is that consumer spending on durable goods fell substantially during the quarter, dropping quarter-over-quarter by 4.4%.

-- Some of the other favorable data, including foreign trade, are likely the result of one-time anomalies (e.g., tsunami suppressed imports).

-- The "deflater" used to translate the nominal data into "real" data continues to suffer from credibility issues, and it may be the entire source of the reported growth.

The Real Problem

The greatest problems in the report, however, were the massive revisions to past history -- including the very recent past. For both the first quarter of 2011 and the worst quarters of the "Great Recession" those revisions were substantial enough to raise questions about the reliability of any of the recently reported BEA data:

-- Data published as recently as 35 days prior had growth rates slashed by over 80%.

-- The worst quarter of the "Great Recession" was revised downward by over 2%, with the annualized "growth" rate now reported to be a horrific -8.9%. And the "peak" to "trough" decline in real GDP for the "Great Recession" is now recognized to be over 5%, halfway to the clinical definition of a full depression.

We have been concerned for some time about the timeliness of the BEA's data, particularly given how much the nature and dynamics of the economy have changed since Wesley Mitchell initially developed the data collection methodologies in 1937. These past revisions, however, lead us to believe that the problems run far deeper -- as demonstrated by a quarter that is now over 2 years old being just now revised downward by an additional 2%. This begs two simple questions:

-- At what point in time can we trust any of the data contained in these reports?

-- How can any of the current data be used to create meaningful Federal monetary or fiscal decisions?

We wonder what Mr. Bernanke thought when told that 80% of his "relatively slow recovery" during the first quarter had just vaporized ...

US Budget Expenditures - CBO Long Term Outlook

Obviously one can question their growth assumptions, and therefore tax revenue assumptions.

However bear in mind that this chart is for the expenditures as a percentage of GDP, and is therefore tied to the growth.

Personally I would think that they would lowball the interest payments, which are not so tied to the CPI as COLA increases in things like Social Security.  Bondholders are not as captive an audience as your old people.  

But as I always say, until the financial system is reformed and the economy is brought back into balance, nothing will 'work,'  whatever combination of austerity, stimulation, growth, and tax changes it may include.  This discussion is the misdirection and distraction, the financial magician's tools, from the actual transfers of wealth being conducted, those transfers being a nice way of saying 'looting.' 

The US resembles post Soviet Russia just prior to its currency collapse and the rise of the oligarchs who sought to monopolize productive assets which they bought with paper and financial manipulation.    Communism died, and it ended in oligarchy.  Democracy is dying, and it too will end in oligarchy, unless something is done to change the outcome. 

Despite the Miss on Expectations Today's US 4Q GDP Number Was Still a Puffball

I just did not have the time or energy to do the work analyzing today's US GDP estimate for the 4Q10.  The drop in stocks and spike higher in metals had me squaring off accounts between the usual non-financial chores. 

For me the 'tell' that something was dodgy was the unusualy lower chain deflator which is used to calculate the 'real' GDP by removing the inflationary effect. .3% versus 1.5% expected and 2.1% prior. For every tick lower on the deflator the headline GDP growth number rises.

John Williams of ShadowStats did his usual excellent job of dissecting the corpus of the BEA's work and I am grateful for this excerpt. His site is a must read.

You may wish to take the time to read some of the free reports, on how the US government numbers are 'adjusted' over time, and his hyperinflation report which is quite interesting. I still do not agree, preferring to stay with my stagflation forecast which has long been my expected outcome. But I am keeping an open mind to both the deflationary and hyperinflationary outcomes.

Bear in mind that the UK had showed a contraction for the same period, a much more credible representation of the numbers. And so the talking heads would say that the UK suffered from the weather, and was mired in snow. Yes, and the US economy is mired in self-serving scoundrels and craven nincompoops.

GDP Estimate Was of Unusually Poor Quality.

This morning’s "advance" estimate of annualized 3.17% real (inflation-adjusted) GDP growth was nonsensical, even though it was somewhat shy of consensus. Most of the reporting was based on guesses; hard data simply are not available this early. Consider that more than the total reported fourth-quarter growth was accounted for by a narrowing of the trade deficit. The Bureau of Economic Analysis (BEA) indicated that 3.44 percentage points of growth was generated by an improved net export account. That estimate, however, was based on just the two months of available data (October and November) for the quarter. December’s data will not be available until February.

As noted in Commentary No. 345, the relative improvement suggested in the trade deficit for the fourth-quarter (based on the October and November reporting) could have added 1.3 annualized (0.3 quarterly) percentage points to fourth-quarter real GDP growth, but not 3.44 percentage points. That differential required extremely optimistic assumptions on the part of the BEA as to the December trade results. Accordingly, the upcoming trade release will be particularly interesting in terms of its implications for GDP revisions.

Separately, after quarters of a significant inventory build-up, a reduced pace of relative inventory increase reduced the reported real fourth-quarter GDP growth rate by 3.70 percentage points. Inventories at this point in time are even less reliable than the trade data. Nonetheless, inventory build-up still accounted for half the annual average GDP growth in 2010.

Also, despite the 30% annualized (8% quarterly) quarter-to-quarter contraction in housing starts, residential investment rose at a 3.4% annualized pace.

The point here is that reported 3.17% annualized growth, with the regular +/- 3.0% 95% confidence interval, along with such unusually large swings in unreliable components, should not be taken as a serious or meaningful measure of quarterly economic growth. I believe that realistic growth would have been flat-to-minus and eventually that should prove out in long-range revisions.

Where early GDP reporting generally is of extremely poor quality, some catch-up should be seen in the annual benchmark revisions due for release on July 29th. At that time — as will be seen with the payroll employment reporting due for revision a week from now — the revisions to prior economic growth generally will be to the downside, showing a more-protracted and deeper economic contraction in place than officially is recognized at present.

With quarterly weakness in the housing starts and in new orders for durable goods, the indications remain in place for a re-intensifying economic downturn, as discussed inSpecial Commentary No. 342.

"Advance" Guesstimate on Fourth-Quarter 2010 GDP Was Unusually Flimsy.

The opening comments covered several unusual issues with the current GDP report. A more traditional problem lies in how inflation was handled. On a one-to-one basis, the lower the inflation rate used to deflate the GDP, the higher will be the real or inflation-adjusted GDP growth rate. Annualized GDP inflation — the GDP Implicit Price Deflator — was reported showing annualized inflation of 0.3% in the fourth-quarter, down from 2.0% in the third, while annualized CPI inflation rose to 2.6% in the fourth-quarter, up from 1.5% in the third.

And some practitioner of economic auterism will snarkily say, "But har har and tut tut. You obviously do not understand that the deflator has nothing to do with inflation, although it purports to perform the function of taking out the inflationary effect. The deflator is merely what we say it is."

And to that I say, yes, and it also has nothing to do with reality, but rather the desire to make black appear white, and hell seem a heaven.

John Williams on the Revised GDP Number

John Williams' comments on the GDP number were short and to the point. I am still not on board with his hyperinflation forecast preferring to stick with a pernicious stagflation, although what he sees is certainly possible, as is a Japan style deflation. That is what 'fiat' is all about.

The correlation in stocks across the various indices today is remarkably uniform. Do you need to buy a vowel?

John Williams of ShadowStats

Economic Data Will Get Much Worse.

The kindest thing I can say about a stock market that rallies on the "stronger than expected" news that annualized growth in second-quarter GDP was revised from 2.4% to just 1.6%, instead of to the expected 1.4% (keep in mind those numbers are quarterly growth rates raised to the fourth power), or that gyrates over meaningless swings in seasonally-distorted weekly new unemployment claims, is that it is irrational, unstable and terribly dangerous.

As the renewed tumbling in the U.S. economy throws off statistics suggestive of a continuing collapse in business activity, as a looming contraction in third-quarter GDP becomes increasingly evident to all except Wall Street and Administration hypesters, who professionally never admit to such news, it would be quite surprising if the financial markets did not react violently, with a massive sell-off in the U.S. dollar contributing to and coincident with massive sell-declines in both the U.S. equity and credit markets.

Recognition is growing rapidly of the re-intensifying economic downturn. Yet, little analysis so far has been put forth to public as to some of the unfortunate systemic implications of this circumstance. The problems range from extreme growth in the federal government's operating deficit, tied to reduced tax revenues and to bailout expenditures for the unemployed, bankrupt states and continuing banking industry solvency issues, to U.S. Treasury funding needs to pay for same. The latter issue promises eventual heavy Federal Reserve monetization of Treasury debt, with resulting inflation problems and eventual hyperinflation (see the Hyperinflation Special Report).

Guest Post: Inside the New GDP Numbers - Consumer Metrics Institute

"The 2010 contraction is now clearly worse than the "Great Recession" was at the same point in their respective time lines. And we don't see a bottom forming yet."

Consumer Metrics Insitute
Inside the New GDP Numbers
July 30, 2010

On July 30th the Bureau of Economic Analysis ('BEA') released its "advance" estimate of the annualized growth rate of the U.S. Gross Domestic Product ('GDP') during the 2nd quarter of 2010. Per their report, the GDP grew during the quarter at an annualized rate of 2.4%, down from 3.7% in the 1st quarter of 2010. Several points from the report merit comment:

► Readers familiar with prior GDP reports will be more surprised by the reported 1st quarter growth as by the new 2nd quarter number (which had been leaked by Mr. Bernanke last week), since only last month the Q1 of 2010 was supposedly growing at a 2.7% rate. Why did the Q1 number suddenly get altered upward by 1%? The BEA quietly revised the 1st quarter inventory adjustment up to a level that represents a 2.64% component within the revised 3.7% figure, with 1st quarter "real final sales of domestic product" now reported to be growing at a modestly improved 1.06% annualized clip, compared to the 0.9% number reported last month. In short, factories were piling on inventory at a substantially higher rate than previously thought, while the "real final sales" remained anemic.

► The 2.4% figure will garner all of the headlines, but the more important "real final sales of domestic product" continues to be weak, growing at a reported 1.3% annualized rate. The real cause for concern is that the reported inventory adjustments dropped from a 2.64% component in the revised 1st quarter to a 1.05% component during the 2nd quarter. If factories have begun to realize that end user demand remains anemic, the inventory adjustments could well go negative soon, pulling the reported total GDP down with it.

Chart 1




► The BEA revised much more than the first quarter of 2010. They revised down 2009, 2008 and 2007 as well. Apparently the "Great Recession" has been worse than our government has previously reported. And the recovery's brightest moment, Q4 2009, has been revised down from 5.6% to 5.0%. Similarly Q3 2009 dropped from 2.2% to 1.6%. And so on. The bottom of the recession was shifted back one quarter, with Q4 2008 now reported to have contracted at a -6.8% rate, revised down from the previously reported -5.4% rate. Most quarters of 2007, 2008 and 2009 have been revised down substantially, shifting the recession shown in the chart above back in time.

► The new GDP report shows that the current gap between the consumer demand that we measure and the BEA's reported number continues to grow as factories build their inventories in anticipation of a strong recovery. If factories curb their enthusiasm during the third quarter, the BEA's "advance" estimate for Q3 2010 might be brutal, just 4 days before the U.S. mid-term election.

► We understand that economists want to ultimately get the numbers right, even if it is three years after the fact. We applaud the BEA for their efforts. But we also understand people who are concerned about quiet governmental revisions to history.

Back to the real world: our Daily Growth Index has dropped to new recent lows, and it is now contracting at a -3.4% rate.

Chart 2



This contraction rate puts the trailing 'quarter' nearly into the 5th percentile among all quarters since 1947, meaning that only about 1 in 20 quarters officially recorded by the BEA since then has been worse. Our "Contraction Watch" places this movement into the perspective of the 2006 and 2008 contractions:

Chart 3



The 2010 contraction is now clearly worse than the "Great Recession" was at the same point in their respective time lines. And we don't see a bottom forming yet.

Consumer Metrics Institute: Growth Index Update Vs. US GDP

The relationship between CMI's Growth Index as an indicator of US GDP is interesting. If it continues its correlation the US GDP is in for a serious slump, if not a double dip. The Fed is likely to initiate a new round of quantitative easing in response, although they will try to jawbone their way around the monetization issues.

Growth Index Past 4 Years



The Consumer Metrics Institute's 91-day 'Trailing Quarter' Growth Index -vs- U.S. Department of Commerce's Quarterly GDP Growth Rates over past 4 years. The quarterly GDP growth rates are shown as 3-month plateaus in the graph. The Consumer Metrics Institute's Growth Index is plotted as a monthly average.

Consumer Metrics Institute's Contraction Watch



The comparison of the 91-Day Growth Indexes during the 'quarter' immediately following the commencement of a contraction. The quarterly GDP growth rates are shown as 3-month plateaus in the graph. The Consumer Metrics Institute's Growth Index is plotted as a monthly average. The contraction events of 2006, 2008 and 2010 are shown against the same scale of annualized contraction.

Charts by the Consumer Metrics Institute

Guest Post: A Double Dip Recession? A View from the Consumer Metrics Institute

I have been looking for a commentary to share with you all regarding the most recent US GDP report. I wanted something that went beyond the obvious inventory buildup that boosted the number by almost double, and the shockingly low deflator that was used.

Here is a commentary that seems to capture the big picture of where the US economy stands today, and is able to express it simply and clearly.

Richard Davis of the Consumer Metrics Institute does excellent work, and is available for interviews.

Enjoy.

"The April 30th GDP report issued by the Bureau of Economic Analysis ("BEA") of the U. S. Department of Commerce was a freeze-frame quarterly snapshot of a highly dynamic economy -- an economy that another source indicates was in significant transition while the snapshot was being taken.

Compared to the 4th quarter of 2009, the annualized growth rate of the GDP had dropped by 43%. Depending on your point of view this could be interpreted either as a glass that is "half-full" or a glass that is "half-empty":

1) The "half-full" reading would mean that the GDP numbers confirm that the recovery had at least moderated to a historically normal growth rate. In this scenario the good news would have been that "the economy is still growing," albeit at a historically normal rate. The bad news would have been that a normal growth rate would only warrant normal P/E ratios in the equity markets.

2) The "half-empty" reading would have meant that the near halving of the GDP's growth rate confirmed that (at the factory level) the economy had finally begun to "roll over". If so, the BEA's announcement portends even lower readings in the quarters to follow.

What was clearly missing in the "half-full/half-empty" debate was a feel for whether the level seen in the snapshot's glass was stable or still dropping. At the Consumer Metrics Institute our measurements of the web-based consumer "demand" side economy support the "half-empty" reading of the new GDP data. The new GDP numbers (which are subject to at least two revisions) agree with where our "Daily Growth Index" was on November 24th, 2009, 18 weeks prior to the end of 2010's first calendar quarter -- and when that index was in precipitous decline.

A look at our "Daily Growth Index" also shows that towards the end of November 2009 the "demand" side economic activity was dropping so quickly that a two week change in the sampling period would make a huge difference in the numbers being reported. If the sampling period had shifted to two weeks earlier, the reported GDP number would have been 4.4%, substantially higher. However, if the sampling period had shifted to two weeks later, the GDP growth rate would have been only 2.0%, less than half the reading from only 4 weeks earlier. This is the sign of an economy in rapid transition.

The methodologies used by the BEA when measuring factory production are ill suited to capturing an economy in such rapid transition. In the 4th quarter of 2009 the production side of the economy was topping (reflecting the topping of our measurements on the demand side in August 2009). The first quarter's production environment was at a much more dynamic spot in this particular economic cycle, and the subsequent monthly revisions by the BEA may be significant.

From our perspective the GDP is only confirming where our numbers were in November -- which is, relatively speaking, ancient history. Since then we have seen our "demand" side numbers slip into contraction (on January 15th), and they have recently lingered in the -1.5% "growth" range (see charts below). We have long since recorded the "demand" side activity that has been flowing downstream to the factories during the second quarter of 2010. If the GDP lags our "Daily Growth Index" by 18 weeks again we should see the consumer portion of the 2nd quarter 2010 GDP contracting at a 1.5% clip, less inventory adjustments."

"As you can see from the above chart the current consumer "demand" contraction event is unique: if there is a "second dip" it may very well be unlike anything we have seen recently. Instead of a "call-911" type of event in 2008 or the "hiccup" witnessed in 2006, we may be seeing a "walking pneumonia" type of contraction that has legs.

Our data is significantly upstream economically from the factories and the products measured by the GDP, putting us far ahead of the traditional economic reports. Perhaps our data is too timely; we are so far ahead of conventional economic measures that our story generally differs (either positively or negatively) from the stories being simultaneously reported by more traditional sources."

Charts and commentary courtesy of Richard Davis at the Consumer Metrics Institute.

Third Quarter US GDP Comes In Significantly Lower Than Original Estimates

Could we have expected anything else from the Madoff nation, a country whose major export is fraud, and predominant industry a large scale variation of Liar's Poker?

GDP in the third quarter is significantly weaker than the results reported in late October. And even the positive value that remains is probably overstated by a chain deflator that underestimates the monetary expansion by the Fed.

Ironically it is ineffective because it is so heavily applied to a broken and outsized banking model rather than to the real economy.

Look for another cycle of exaggerated improvement for the 4th quarter, with later revisions bringing the number well back to earth.

Oh look here, the second quarter was bad indeed, but the third quarter is a miracle of growth. Thanks to the stimulus and automotive programs of the government disaster is averted and all is well....

Oh wait, the third quarter was not so good after all, but the indications are that the fourth quarter is a miracle of growth. Thanks to the housing programs of the government disaster is averted and all is well.

What, you deny this? Do you not wish things to be better? Are you a dollar basher? (repeat as necessary until the fraud collapses completely.)

This is the campaign of perception management by the financial engineers in the Federal Reserve and the US government, and cynical statists of both the left and the right.

"The power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them....To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then, when it becomes necessary again, to draw it back from oblivion for just so long as it is needed, to deny the existence of objective reality and all the while to take account of the reality which one denies — all this is indispensably necessary. Even in using the word doublethink it is necessary to exercise doublethink. For by using the word one admits that one is tampering with reality; by a fresh act of doublethink one erases this knowledge; and so on indefinitely, with the lie always one leap ahead of the truth." George Orwell

“Through clever and constant application of propaganda, people can be made to see paradise as hell, or to consider the most wretched sort of life as a paradise.” Adolf Hitler

"Print is the sharpest and the strongest weapon of our party. The writer is the engineer of the human mind." Josef Stalin

NY Times
Third-Quarter Growth Weaker Than First Thought
By JAVIER C. HERNANDEZ
December 23, 2009

The nascent economic recovery was weaker than expected in the third quarter, the government said Tuesday, held back by slow business construction and dwindling inventories.

The Commerce Department said the economy expanded at an annual rate of 2.2 percent from July through September, down from the original forecast of 3.5 percent, tempering some of the enthusiasm about the speed of economic renewal. The downward revision was well above average, but analysts still foresee stronger growth in the fourth quarter, as exports rise and an improved jobs market encourages consumer spending.

“We did get off to a slightly slower start than we had thought,” said Nigel Gault, chief United States economist for IHS Global Insight. “That would be very worrying if we didn’t have evidence that we had done well in the fourth quarter.” (The same evidence that will be significantly marked down after the fact, just like the original overstated estimates of 3rd quarter GDP - Jesse)

....Analysts were caught off guard by the magnitude of the decline in the rate of expansion, measured in terms of gross domestic product — the total value of goods and services in the economy. Last month, the government revised the rate to 2.8 percent in the third quarter, down from 3.5 percent in October, and economists surveyed by Bloomberg News expected it to remain steady.

A revival of exports and consumer spending in the last part of 2009 is expected to bring the rate of growth to about 5 percent for the fourth quarter. The momentum will probably continue into 2010, economists say, though high levels of unemployment and a skittish business climate may curb consumer spending, hiring and production.

The Commerce Department’s revisions were based on smaller-than-expected business inventories, which fell by $139.2 billion. Spending by businesses on items like software and equipment was also weaker than expected, rising by 5 percent rather than the 8.4 percent originally predicted.

Paul Dales, chief economist for Toronto-based Capital Economics, said the overall drop was “nothing to worry about,” but he expressed concern about the decrease in investment by businesses.

“It may suggest that a lot of the demand pent up during the recession has already been released,” Mr. Dales wrote in a research note on Tuesday. “High uncertainty and lots of spare capacity are limiting capital spending.”

Construction of business facilities like malls and office buildings fell more than previously thought, by 18.4 percent rather than 15.1 percent. Economists attribute that drop to a frail commercial real estate market, which is confronting high vacancy rates and banks that are reluctant to finance business expansions.

Spending by state and local governments was also weaker than expected, falling 0.6 percent, compared with the 0.1 percent originally forecast. Consumer spending was revised slightly, growing 2.8 percent in the quarter rather than 2.9 percent.

As the New Year approaches, investors are optimistic that the economy will build on its earlier gains rather than fall into another downturn. Retail sales were higher than expected in November, and the trade deficit unexpectedly narrowed in October. In addition, a weak dollar is making American products overseas cheaper, contributing to hope that exports will rise.

The Particularity of Japan from an Economic and Demographic Perspective

Since Japan is so often, and as we think incorrectly, cited as a likely deflationary pattern for the US in monetary outcomes, and since so few who discuss this subject have an understanding of Japanese culture and social structures, I thought it would be timely to point out a basic fact that should be reasonably well known but is so often overlooked.

Japanese population growth is flat, and the percent of the population that is no longer economically productive is growing rather quickly.

So would we be so suprised that Japan's GDP is flat, and that their money supply growth is sluggish? One should not be, unless they are not bothering to look at the data.

America also has an aging population as do many countries, but Japan is unique because of its extraordinarily low rates of immmigration due to the very homogenous nature of Japanese society.



Japanese population is now estimated at about 127.7 million people with a very nominal immigration rate of about 20,000 people per year and a negative birth-death rate.



When one mixes a negative native birth-death rate and very low immigration due to a rigid approach to race and citizenship, it should be no suprise that Japan has an unusually high level of elderly citizens.



The charts seem to suggest that countries with significantly aging populations with low population growth will experience a natural slow growth in GDP.

As you know we tend to like to view money supply growth and GDP in relation with each other and to per capita variables.

When one adds to this demographic mix the Japanese cultural bias to low domestic consumption and a high savings rate, and a bureacratic bias to a mercantilist industrial policy, the reasons for Japan's economic status become rather obvious.



I am not suggesting that Japan must change. I have spent many happy moments in Japan, and spent a great deal of time to learn the language and understand the culture, albeit with results inadequate to my hopes.

I have had many Japanese friends, and find great enjoyment in their art and music and social personality. I regret that I have not been to visit there in some years, and have forgotten so much and miss so many old acquantances. And I am particularly at a loss for their wonderful cuisine which I find fascinating, uniquely refreshing and delightful.

It is important to understand a country in its context, and with some attention to detail and its particulars, if one is going to perform an economic analyis and then perform broad comparisons and construct models.

Demographically speaking, Japan is an outlier with some unique characteristics. If one does not consider this, it can be a source of false conclusions.

Collapsing US Aggregate Demand Strikes Imports Hardest

Falling aggregate Demand and the weaker dollar have finally broken the back of the parabolic growth of imports and the US trade deficit.



As one can see, imports have been hit much harder than exports. This is why Japan and China will be struggling with their export driven GDPs.



This is the worst decline in retail sales in the post World War II era.

The US consumer has finally hit the wall. The folks in DC think they can crank this Frankenstein monster of reckless consumption back up again, given the right jolts of liquidity and spin.

To think that consumers will start borrowing and buying again without a meaningful change in the dynamic of their cashflows implying an increase in the median wage, is a hard to believe. Even for the reckless American consumer, this episode has been daunting to their over-confidence, and rightfully so.

Let's hope they don't just patch this bubble and blow it back up again. But it certainly appears as though Larry, Ben and Tim are going to try and take it to the limit one more time.

GDP Number Far Worse Than Expected by Most Economists (But Not Here)

The Fourth Quarter GDP number came in at a negative 6.2% versus the original negative 3.8 percent announcement earlier this year.

That is not a big adjustment. It is a HUGE adjustment. That first number was so obviously cooked by a high side inventories estimate and a lowball chain deflator that it was a knee-slapping howler to anyone who is following this economy closely.

This decline did not happen overnight. It is merely being reported that way.

There should be little doubt in most people's minds that Bernanke, Greenspan, Paulson, and many in the Bush Administration were deceiving us about the state of the economy, for years, almost routinely as a matter of course.

That is important to understand. This was no act of God, no hurricane or meteor strike. And a lot of folks on Wall Street and in Washington playing dumb now knew what was coming. You can decide their motives for yourself, but fear and greed should be high on the top of your list.

The economy has been rotten for a long time, since at least 2001 if not before, and as it worsened more and more money was taken off the table by the Bush Administration and their corporate cronies through no bid contracts and welfare for the wealthy. Coats of paint were slapped over the growing imbalances, market manipulation, malinvestment, fraud and corruption.

Remember that. Don't let it go. Because as sure as the sun will rise, these jokers will be back in business given half the chance. They are shameless, greedy beyond all reason, and persistent. The fiscal responsibility being preached now by the Republican minority is repulsive hypocrisy.

That is why it is so disappointing to see what looks like business as usual from the Obama Administration. Larry Summers appears to be a tragic choice as chief economic advisor. And Tim Geithner, while a capable fellow, is not a thinker, but a doer, an implementer, and a disciple of the fellows that caused this mess.

What to do? Let them know now we expect reform. Don't fall for the same old rhetoric from the 'conservative' think thanks and paid pundits who misled you for the past eight years. They are not conservatives. They are jackals who play on your emotions. And let's not accept a new batch of paid pundits and clever deceivers either. But don't give up and pull over a blanket of cynicism.

Typically Americans will give a new president like Obama 100 days to get his bearings and deal with a tidal wave of problems that he did not create. We do not expect him to fix them, but we want to see a decent start in the right direction. We gave Bush far too much allowance, primarily because of 911 which his handlers played for all it was worth.

So far, with some noted exceptions in non-financials, we the people have not seen what we voted for last November.

President Obama recently said that Wall Street reform is coming, but it will take time.

Mr. President, you may not have the leisure to show us that you know what needs to be done. You are riding a high tide of bipartisan support in the people who voted for you. Once you lose them it will be very difficult to get them back.

We must demand action from the Congress and the Administration who we recently put in place through the elections to clean this mess up and then change the system that delivered it.

Contact the White House

Contact Your Senator

We do not want fewer, bigger banks exacting a fee on every commericial transaction in this country.

1. Bring back Glass-Steagall.

2. Clean up the derivatives market, starting with J.P. Morgan and their 90 Trillion dollar positions.

3. Enforce the various anti-trust laws, enacting new ones where necessary, and break up the media and banking conglomerates.

4. Enact aggregate position limits in all commodity markets and transparency with immediate disclosure of all position over 5% in any market.

5. Effective restrictions and enforcement of naked short selling, price manipulation, reinstatement of the 'uptick rule,' the prohibition of regulated banks from engaging in any speculative markets either for themselves or as agents, and usury laws and regulation of all interstate financial transactions at the national level.

And for the sake of the country, establish a vision, a model, of what the system should look like in accord with the Constitution. And then strike out for it, as painful as that may be, and stop this management by crisis.


Bloomberg
U.S. Economy Shrank 6.2% Last Quarter, Most Since ’82
By Timothy R. Homan

Feb. 27 (Bloomberg) -- The U.S. economy shrank in the fourth quarter at a faster pace than previously estimated as consumer spending plunged, companies cut inventories and exports sank.

Gross domestic product contracted at a 6.2 percent annual pace from October through December, more than economists anticipated and the most since 1982, according to revised figures from the Commerce Department today in Washington. Consumer spending, which comprises about 70 percent of the economy, declined at the fastest pace in almost three decades.

The recession is forecast to persist at least through the first half of this year as job losses mount and purchases plummet. The Obama administration’s attempts to break the grip of the worst financial crisis in 70 years are unlikely to bring immediate relief as companies from General Motors Corp. to JPMorgan Chase & Co. cut payrolls.

“There has been no evidence that the pace of decline is slowing at all, there are other shoes waiting to drop,” Bill Cheney, chief economist at John Hancock Financial Services Inc. in Boston, said in an interview with Bloomberg Television. “There is a chance that the stimulus package will kick in” in the middle of this year, he said.

US 4Q '08 GDP Advance Number Out Tomorrow Morning

The US will release its Advanced Estimate of GDP for the fourth quarter of 2008 tomorrow morning at 8:30 AM.

The consensus of economists is for -5.4% which is a quarter number, non-annualized to put this into comparison with other countries which annualize their numbers.

A low end print of -6.0% is the whisper with the "Yikes!" number at -7.0%

It is thought by some that the Obama Administration release a conservative advance estimate to help shock the Senate into acting on their stimulus package. Who can tell about such things?

Keep an eye on the Chain Deflator which is estimated to come in at 0.6%.

In addition to GDP, the Chicago PMI and Revised Michigan Sentiment for January will also be released at 9:45 and 9:55 respectively.

Recessions and the SP 500

Paul Kasriel's latest reading of his proprietary tea leaves (a blend known as the Kasriel Recession Warning Indicator) estimates the current probability of a recession in the US economy at 65%. As the chart shows, once his KRWI reaches this critical level its a strong probability that we will see an economic recession call by the National Bureau of Economic Research (NBER). Even the period following the tech wreck of 2000 eventually read out a formal recession, although the financial engineering of the Fed and federal friends did block the traditional back to back quarters of economic contraction, as the inflation reading is subtracted from the nominal GDP number to develop real GDP. Hard as it may be to believe, the government has simply changed the rules of the game for measuring price inflation in the US, and considerably enough that what used to be a recession may no longer be called one. Changing the rules of the game is a traditional method of the privileged and elite in achieving their goals.

We give a lot of credibility to Paul Kasriel in general, as a classic macro economist who seems unaffected by the dark pollution of biased thought that corporatism has brought to an already dismal and confounding science. The Leading Economic Indicators (LEI) are already calling out recession, and as you know, the classic inversion of the Yield Curve (Ten Year Treasury Yield - Effective Fed Funds Rate) is still negative as of the Fed's official numbers last week.

So it bothers us quite a bit that the stock market, that great discounter of the future and unerringly efficient prognosticator of economic things yet unseen, is presumed to be rallying back to new all time highs, even if only on a nominal level, not accounting for inflation. We show the SP deflated by gold in this chart, and as you can see, the rebound in US stocks is a bit of a mirage. If the bad times are when the tide goes out and shows who's naked, then inflation is the hurricane storm surge that pushes the waters back in, to provide cover for those au naturel.

By the way, the perception of inflation, or inflation expectations, is not incidental, but rather is absolutely key to the kind of financial engineering that neo-Keynesian economists that infest the Fed and Treasury wish to embrace as the ripe fruits of a fiat monetary system. Don't think for one minute that what is happening with M3, CPI revisions, etc. are a mere coincidence. Its all about control of the many by the few, after all.

So what about the stock market? We decided to try and plot out Kasriel's indicator of recessions against the SP 500. Since the nominal SP is also a trend child of inflation, we wanted to get a measure of SP that tends to take out the inflationary trend, and show us the purer wiggles that stocks make in response to the anticipation of economic variations.

If in fact we are on the verge of a recession, the SP500 will likely be in the process of making a top. We might see another push higher by the broad stock indices in response to the unprecedented monetary stimulus being applied by the banks. But even with this latest phase in the financial engineering experienment currently in progress, within the next two months we should see a confirming signal from the equity markets that the economy is turning lower in real terms AND has started contracting, even if the current set of official economic measures say otherwise.

We underestimated the Fed and their banker buddies in the great reflation of 2003-2004, finally catching on to the game after some painful soul searching and genuine confusion. The July 2004 working paper from Small and Close of the Fed, which basically tried to set some boundaries in how far the Fed could go in monetizing things non-traditional was a good clue, well before the infamous speech about the Fed's printing press that gave Helicopter Ben his sobriquet.

So we will strive to not be fooled again, and keep an open mind that the fighting of the housing bubble and massive credit fraud by the banks could have a short term second order effect of inflating the stock markets, along with most other commodities, especially gold and oil. One thing we are certain is that the next twelve months may be among the most interesting we have seen, and can only wonder what we all might be saying about things at this time next year.

A Snapshot of the US Economy

If we were using the same measures of the economy that the government had in place prior to the Clinton - Bush administrations, the economic picture would be considerably clearer. Here is a quick checklist from John Williams of Shadow Government Statistics:

"We publish an analysis of the government statistics: where they are right, where they are wrong, and the implications if they are wrong, which is generally the case. In fact, what has happened over the years is that changes in methodologies have been implemented in reporting the key statistics, with the effect that economic statistics seem stronger than real growth, and inflation numbers tend to be weaker than reality, enough so that GDP (Growth Domestic Product) is overstated by three percent; the unemployment rate is really up around 12 percent as most people would look at it, and the inflation rate is now topping 11 percent."

Remember Okun's Misery Index?

Inflation Rate + Unemployment Rate = the Misery Index

If we use John Williams' numbers for Inflation Rate and Unemployment the current Misery Index is now at 23, which is worse than anything seen in the Carter stagflationary recession. What Jimmy obviously needed was a staff of more creative accountants and statisticians.

If an economy falls in a forest of deception, and no one sees it happening, do the victims make a sound when they hit the wall?

Recession: Straight Up, With a Twist

There is a significant debate going on in economic and financial circles about the odds for a recession in the United States in 2008. In fact we heard on Bloomberg Television a savant saying that it is unthinkable that the economy could decline to negative so quickly from its current positive growth.

Definition of a recession

The textbook definition of a recession is two consecutive quarters of negative growth in real GDP. This definition has been problematic in this decade however, because of the tinkering that our government has done with the measures of inflation. As you know, real GDP is GDP deflated by the inflation rate. The official deflator used for GDP is called the GDP chain deflator.

The National Bureau of Economic Research (NBER) recognized this and determined that there was a recession in the US in 2001 from March through November, even though the quarter to quarter real GDP annualized growth rates for the four quarters of 2001 were -0.5%, 1.2%, -1.4% and 1.6%. As you can see, we did not have two consecutive quarters of real GDP declines. How does the NBER explain this?

"Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. According to current data for 2001 [as of October 2003], the present recession falls into the general pattern, with three consecutive quarters of decline. 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 [including personal income, employment, industrial production and manufacturing/trade sales]. 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."

The point of this diversion is to define what a recession is, although it cannot be so neatly compartmentalized to such a simple formula, especially in these times of government revision of economic data.

A quick look at the chart at John Williams' excellent site, Shadow Government Statistics will give you the idea of how the notion of Consumer Price Inflation has been distorted by the Clinton and Bush administrations. Inflation has a direct effect on real GDP, and therefore on the formal definition of recessions. Of course, it has a real impact on lots of other things including consumer and voter sentiment, and Social Security and other cost of living increases, which is a strong incentive for the government to down play inflation.


Advance Indicators of Recession

We tend to favor the US Treasury yield curve as a significantly reliable indicator of approaching recessions. Here is a description of the classic definition from Paul Kasriel of Northern Trust:

"...each of the past six recessions (shaded areas) was preceded by an inversion in the spread between the Treasury 10-year yield and the fed funds rate. But there were two other instances of inversion - 1966:Q2 through 1967:1 and 1998:Q3 through 1998:Q4 - immediately after which no recession occurred. It would appear, then, that an inverted yield curve is more of a necessary condition for a recession to occur, but not a sufficient condition. That is, if the spread goes from +25 basis points and to -25 basis points, a recession is not automatically triggered. Rather, whether an inversion results in a recession would seem to depend on the magnitude of the inversion and, to a lesser extent, the duration of it. Recession-signaling aside, the yield curve remains a reliable leading indicatorof economic activity. Although the spread going from +25 basis points to -25 basis points might not result in a recession, it does indicate that monetary policy has become more restrictive." That's the current theory, but has it? Has the growth of US money supply been restrictive?

Has Monetary Policy Been Restrictive?

The most alarming thing to us is that despite the inverted yield curve and the Fed funds tightening we just witnessed over the last few years, from historic lows to the 5+% level, monetary policy has not only NOT been restrictive, it has been what many would define as loose. When one looks at real interest rates we had been in a prolonged period of negative interest rates, and only recently had been back in the positive area. It appears that we might be slipping back down into the negative again as the Fed tries to forestall the impending recession and the collapse of the stock - housing bubbles.

It appears to us that even while the Fed feigned monetary conservatism with the right hand, with the left hand they were doing all that was in their power to encourage the reckless growth of credit and the lowering of regulatory oversight and market discipline. To use an analogy, they were preaching energy conservation while running every light on in the house, the backyard, the neighbors house, and slipping pennies into the fuse box to keep it all going. Well, here we are.

What we are seeing is true moral hazard, the unintended consequence of the financial engineering being practiced by the wizard's apprentices at the Fed helping to nuture market distortions, asset bubbles, and imbalances that have become too big to correct naturally without systemic risk. Even though one can mask one's actions with words, and use information selectively and slyly to dampen the alarms and misdirect the public awareness, the chickens will come home to roost, and in this case they are more like the nemesis of retribution for our many economic trespasses. Let us hope that it is not as bad this time as the last time the Fed tried short circuit market discipline and engineer the economy centrally. We believe that the next twenty years or so will provide a rich opportunity for study, and probably the rise another new theory, a new school of economics, that tries to account for exactly what happened and why.

We are old enough to remember that stagflation, now seemingly so familiar, was once considered an improbability, a black swan. In the 1970's stagflation was triggered by an exogenous supply shock in the disruption in the market pricing of crude oil, impacting a slowing economy in monetary inflation from the post-Nixon era and the abandonment of the vestiges of the gold standard. The tonic that time was the tough monetary love of Paul Volcker.

What will they call it when a slowing economy with monetary inflatin is hit with a currency shock, as the dollar is displaced as the reserve currency of the world? We're not sure what they will call what we are about to experience, except on the bigger scale of thing, it will be just another episode in the hubris of arrogant men who consider themselves to be above principle, above the rules.