GDP Growth?

by Larry Levin

The market went crazy with glee last Friday when it found out that the GDP report was close to the expectations. For a change the inept economists that supply Fraud Street with its expectations did not embarrass themselves. The report showed growth two-tenths better that expected.

Unlike inflationary data, the GDP data is annualized to make it sound more palatable than it really is, just like inflationary data is reported on a monthly basis to keep it from sounding catastrophic if one or more months showed a surge in prices. To be sure, few would be excited over the true monthly GDP growth, which is just .00133%. Uh huh, real exciting!

Below we read another quick update on the GDP data from analyst Dave Rosenberg of Gluskin Sheff & Associates.

REVISIONISTS UNITE!

Like the equity analysts, the economists are now in the process of cutting their GDP forecasts — but in dribs and drabs, and nothing very draconian just yet. It is interesting to see that the hopes of a 3%-plus growth for this quarter have been marked down to 2.5% in just three short months and frankly, it looks like the economy may even be contracting right now. The consensus has only now begun to touch Q4, and there is probably much more work to do on this score as well.

The bright light in the Q2 revision was the uptick to consumer spending, to a 2% annual rate from 1.6%, while at the same time we had the inventory line revised lower to a $63.2 billion build from $75.7 billion. This configuration is alleviating concerns that a move to take inventories down in the third quarter will be necessary since household spending held up better than earlier expected.

Real GDP in the U.S. came in higher than expected, coming in at 1.6% versus market expectations of 1.4% in Q2. Boy oh boy, 1.6% never felt so good. Be that as it may, much of the upward revision on consumer spending was in services and non-durables, and it looks to be energy related (gas, electricity). In real terms, consumption of gasoline/other energy goods rose at a 4.7% annual rate whereas in the previous “take” on Q2 GDP it was reported to be up only at a 0.7% annual rate. Spending on utilities also swung from what was reported before as a 0.7% decline to a 1.5% increase. Strip out the energy components, and consumer spending did not improve at all from the last Q2 report we were issued a month ago. In other words, if not for the fact that more of the household budget was diverted to the energy bill in Q2, consumer spending would have shown a 1.6% growth rate and GDP would have actually come in BELOW consensus, at +1.3%. Notably, consumer spending on big-ticket durable goods came in lower than initially estimated — trimmed to a 6.9% annual rate from 7.5%.

Here’s what is important to take away:

* We had 5% real GDP growth in the fourth quarter of last year, followed by 3.7% in Q1, 1.6% in Q2 and now what looks to be little better than 0% this quarter. So the notion that the economy has hit stall speed has not changed in this report —if anything, it was enhanced.

* Real final sales — GDP excluding inventories — was actually marked down in this report to a meager 1% annual rate. That is really soft and underscores the overall weakness in the demand guts of the economy. We know from the monthly data that much of this paltry 1.6% growth in Q2 was baked into April — four months ago! — and that the pace of activity has weakened markedly ever since.

* The monthly GDP data have actually shown declines for two months running and there is a negative “build in” so far for Q3. There is practically no growth in real consumer spending heading into the current quarter and we know that back-to-school sales so far have been sluggish.

One more comment on Q2 — just to put 1.6% into context. Historically, four quarters following a bottom in GDP, growth is running over a 6% annual rate. Rejoicing over 1.6% because it wasn’t 1.4%, particularly in the context of the most radical bailout, monetary and fiscal stimulus in U.S. history, totally misses the point that we are operating in a totally abnormal and fragile economic environment.


Previous Day's Trading Room Results:

Trade Date: 8/27/10

E-Mini S&P Trades*
(before fees and commissions):


1) PP buy @ 8:42am at 1049.50 = -1.25 (1 lot)

2) Algorithm positions (16)

3) “Reading the Tape” positions (7) combined Secret’s, Algo, & “Reading the Tape” total… +2.25



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