G.D.P.

by Larry Levin

Last last week the government announced the advance read on Q3 GDP. The print came in at 2% and fell inside economist's expectations. Because it wasn't (surprisingly) a horrible number I heard the president on television talking up the "good" GDP data. In the sound bite he said that the economy grew at 2% in the 3rd quarter but that's not true. The economy grew at a rate of 2% annualized in the 3rd quarter - specifically, just 0.50%. In a quick response that mistake can easily be made, but I wanted to clarify the data.

Not everyone shared the president's upbeat feelings over the report. Analyst David Rosenberg of Gluskin Scheff reads bad news in the data which follows...

The major problem in the third quarter report was the split between inventories and real final sales. Nonfarm business inventories soared to a $115.5 billion at an annual rate from the already strong $68.8 billion build in the second quarter — this alone contributed 70% to the headline growth rate last quarter. If we do get a slowdown in inventory investment in Q4, as we anticipate, it would really not take much to get GDP into negative terrain. We estimate that if the change in inventories slowed to about $94.0 billion in Q4 (about $22 billion below Q3 levels), GDP would contract fractionally. In other words, it won’t take much for GDP to slip into negative terrain.

The recession may have technically ended, but outside of inventories, and the best days of the re-stocking process look to be behind us, this has been a listless recovery. At 60 basis points above zero, real final sales are just a shock away from double-dipping — a shock like looming tax hikes, accelerating fiscal cutbacks at the state/local government level or the millions of “99ers” about to fall off the extended jobless benefit rolls at the end of November.

In terms of components, the good news was that consumer spending did accelerate to a 2.6% annual rate from 2.2% in the second quarter — the best performance since Q4 2006. Non-residential construction eked out a 3.8% annualized gain, the first advance since Q2 2008. But the good news pretty well stopped there.

It is also no surprise to see imports bulge when inventories did the same, but what caught our eye in the external trade portion of the GDP report was the sharp slowing in export growth, to a 5% annual rate trend — half the pace we saw in the first half of the year. Weren’t the overseas economies supposed to be providing a big lift to the U.S. economy?

Finally, state and local government spending dipped 0.2% — the fourth decline in the past five quarters. At a 12% share of the economy, this sector is nearly twice as large as business spending, and can be expected to be a dead-weight drag on the economy as far as the eye can see.

Here is the bottom line: the double-dip has been delayed but not derailed; despite widespread cries from the economic elite to the opposite. The economic recovery is extremely fragile and unless we get an improvement in real final sales, all it would take would be a modest inventory drawdown to pull real GDP back into contraction mode.

Previous Day's Trading Room Results:
Trade Date: 10/29/10
E-Mini S&P Trades*
(before fees and commissions):

1) No Secrets trades filled today

2) Algorithm positions (10)

3) “Reading the Tape” positions (7) combined Secret’s, Algo, & “Reading the Tape” total… +7.25

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