Q4 Nominal GDP: Worst Since 1958
Yesterday, I was busy dealing with two big projects: John Mauldin’s newsletter, and interviewing new publishers for the next book (no, it ain’t gonna be McGraw Hill again).
This kept me away from my favorite wonk activity, dissecting the latest government data dump. Or as it is known on college campuses across the land, Intro to Creative Writing & Poetry.
Barron’s Randall Forsyth takes a swipe at the numbers:
“The litany of woes was capped by the government’s first stab at estimating the fourth quarter’s gross domestic product, which was shown to have contracted at a 3.8% annual rate, after the usual adjustment for inflation and seasonal factors. Though much worse than the 0.5% decline in the third quarter, it was less severe than the 5%-6% drop forecast by economists, if that offers any solace.
The skid was tempered by an unexpected rise in inventories, which added some 1.3 percentage points to the headline GDP number, according to Steven Wieting, economist at Citigroup. Excluding inventories, real final sales shrank at a sharp 5.1% annual pace, about as expected and much more severe than the 1.3% contraction in the preceding quarter. That points to destocking in this quarter and the quarters ahead as production is cut to bring it in line with demand.
But falling prices also made the real decline appear less severe than it was. Nominal GDP collapsed at a 4.1% annual rate in the latest quarter, the sharpest drop in a half a century. And it would have been worse were it not for Uncle Sam’s spending; private final sales plunged by 6.5% while government spending expanded at a 1.9% pace despite contracting state and local expenditures.
“Once again, real GDP growth appears to be a poor metric of the recession,” write John Ryding and Conrad DeQuadros, economists at RDQ Economics. Consumer spending plunged at a 3.5% annual rate in the current quarter, residential investment collapsed at a 23.6% rate and real business spending plummeted 19.1%. “There was no demand from the private sector in the fourth quarter,” they conclude. And the same was true globally. Exports fell at a 20% annual rate as the recession spread abroad.
While real GDP was the weakest since 1982, nominal GDP was the worst since 1958. The difference is falling prices, which makes the real measure seem less dire. But Ryding and De Quadros contend that the unemployment rate is a better indicator of the economy than GDP. As the tally of the layoffs rises, that paints a still-drearier picture. (emphasis added)
I’ve had a pretty reliable gut on the real economy versus official economic data — its not fat, its actually filled with proprietary economic sensors — and this is only part of the story. My Spidey-sense tells me there is much more to this number than the usual soon-to-be-revised downwards preliminary data.
I’ll hunt about to see if there is anything beyond the usual funny stuff going on . . .
>
Source:
What’s So Super?
RANDALL W. FORSYTH
Barron’s JANUARY 31, 2009
http://online.barrons.com/article/SB123335939695435159.html
Gross Domestic Product (GDP)
8:30 A.M. EST, FRIDAY, JANUARY 30, 2009
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
http://www.bea.gov/national/index.htm#gdp
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January 31st, 2009 at 10:06 am
In fact, I’m starting to put together a new economic theory of the US and world. I have not yet developed it to the point of full clarity but it basically goes …
“Nothing that the texts say matters, really does. The theories tells a good story and give people something to talk about, but most are crap when compared to real world events. I’m starting to think a trillion dollar deficit wouldn’t hurt a kitten, although it would scare the crap out of people who make a living out of talking and writing about economic theories (few of which actually amount to much.) Crooks run everything important and their skill at making the economy a money machine will keep it going”
January 31st, 2009 at 10:09 am
“I’ve had a pretty reliable gut on the real economy versus official economic data — its not fat, its actually filled with proprietary economic sensors….”
Good to know. I got a little worried when I saw you on CNBC the other night. :)
January 31st, 2009 at 10:14 am
“Crooks run everything important and their skill at making the economy a money machine will keep it going”
Denial, Pollyanna, stark realism, spot on clarity, nobel prize material, bad hangover, other …
Which one best describes my new idea?
January 31st, 2009 at 10:32 am
Seems the market initially was poised to rise as some felt relief the GDP wasn’t as horrible as generally expected. Then after some analysis on the numbers began, like the inventory issue, the excitement faded completely. After all, if inventory is building, then it tells us things aren’t selling and that this will push back through the supply chain. At least the market is reacting somewhat more appropriately to the news than a few weeks back when it rose in the face of increasingly bad news.
Perhaps what’s getting more distressing is the excellent cases I’ve been reading on other sites (sorry Barry) like seeking alpha, where just yesterday was a beautiful comparison to what our gov’t and populace is doing vs. what hapened in Japan over 2 decades ago and continuing through ’till today. Considering the author’s position that Japan had a number of advantages going into this “lost decades” phase over where we are – it did not paint a pretty picture for what’s to come. I’m still waiting for the credible, cogent arguments that paint a happier picture, but I just haven’t seen them. And the rationale that things will improve in the next several months because recessions only last X number of months is not a credible, cogent position. But that’s about the best I’ve seen.
January 31st, 2009 at 10:38 am
Ben Stein, on Fox just now, in one statement uttered the two memes that infuriate me…
1) The ‘”crisis” happened because Lehman was allowed to fail.
2) The “crisis” will be solved if only banks were to lend again.
“Ben Steinery” as a eupemism for stupid, vapid analysis is alive and well.
January 31st, 2009 at 10:43 am
@dead hobo:
Your conclusion is a little twisted…most mainstream economists think nothing really affects the economy much, because the “system” is too resilient to fail. For example: I once asked a Chief Economist on Wall Street what would the effect be of the gross capital misallocation from the Internet boom…he said it would have little effect. In fact, such gross capital misallocation (Internet, housing, financial products) is what is about to bring down the very system.
January 31st, 2009 at 11:08 am
@Steve Barry: Ben Stein is so unnerved by just how wrong he was, he needs to tell himself a nice little, neat story to make himself feel better as he looks at his investment statements’ rapidly declining worth.
January 31st, 2009 at 11:33 am
@Mannwich:
You are probably right on…when you foolishly lose a large part of your nest egg, it relieves you of all blame to say if they had only bailed out Lehman, you wouldn’t have lost anything.
January 31st, 2009 at 11:42 am
“Ben Steinery” as a eupemism for stupid, vapid analysis is alive and well.
That would be a big YES.
All this just serves to throw more acid on the confidence of the public.
January 31st, 2009 at 12:06 pm
If we’d just get all the back taxes owed by Obama’s nominees we could pay off a good chunk of the debt and deficit.
January 31st, 2009 at 12:41 pm
Great to see increased inventories. That means more $$ for creditors in liquidation. :-)
January 31st, 2009 at 2:03 pm
Unless and until the unemployment numbers account for those who’ve been out of work so long that they’ve given up looking, and the “self-employed” who actually have no work, the unemployment stats from the gov’t are meaningless.
January 31st, 2009 at 2:12 pm
Here’s that weekend news I was looking for (knew something would have to come this weekend with market on the precipice)! Looks like “bad bank” plan may go through next week. Of course it will. This is becoming all too predictable…..here comes our rally. If we get anything significant, I’m dumping all of my remaining longs into strength.
From CNBC: ‘Bad Bank’ Run By FDIC Possible By Next Week: Source
The talks are said to have yielded agreement that the FDIC would run the bad bank, according to an source. … Thursday could be the announcement day.
http://www.calculatedriskblog.com/
January 31st, 2009 at 2:31 pm
It looks like production couldn’t slow down fast enough. This train wreck is still being under appreciated.
January 31st, 2009 at 4:55 pm
Barry,
Well, I hear that Mauldin is finally ready to discard his “muddle through” thoughts about how we are going to go through this. He was always trying to be the “voice of reason” among us chicken littles with his muddle through hypothesis. Now he’s coming around. I think he can’t stand to be away from the croud. Anyway, at least he acknowledges thaat we have overcapacity and too much stuff. Why doesn’t he also acknowledge that goods and services are overpriced? He says there will be some “deflation”. Is that the new twist to supply and demand? What these “asset managers” don’t want to see is that EVERYTHING is overpriced. They always want ROI. They need to realize that a huge segment of the population was cheated to enable them to get their ROI and it has to stop while this segment gets a life or else.
On another subject, I wanted to ask the commenters what they think of this “bad bank” policy on the mortgages. I read about it in “The Rude Awakening” newsletter.
The bad bank hires laid-off mortgage brokers to refinance each homeowner with a mortgage that’s been sliced and diced into exotic securities now sitting on the bad bank balance sheet. This is not feasible without owning a huge chunk of toxic assets, because claims on sliced-and-diced mortgages are spread all around the global banking system. Appraisals will be waived in situations of negative equity, and principal will be written down. This may include the homeowner granting the lender some sort of future ‘property appreciation right’ in exchange for a principal write-down.
Do you think this would work?
January 31st, 2009 at 5:15 pm
Non-economist/non-finance person here with a question. Why does the rise in inventories alter the GDP? I don’t understand how inventories are factored in, and why the increase would make GDP look less bad than it does.
January 31st, 2009 at 5:48 pm
Imelda Blahnik,
Inventory “rise” isn’t what affects the GDP. The GDP calculation assume that in ou “just in time” world, puchased inventory will be sold en toto. So, when sales plummet too fast, the number looks better because the fat inventory was assumed to be commited to sales. This will change next month. What happened in December is that purchasing managers just couldn’t believe that sales would tank in that particular month.
January 31st, 2009 at 5:50 pm
CORRECTION:
Imelda Blahnik,
Inventory “rise” isn’t what affects the GDP. The GDP calculations assume that in our “just in time” world, puchased inventory will be sold en toto. So, when sales plummet too fast, the number looks better because the fat inventory was assumed to be commited to sales. This will change next month. What happened in December is that purchasing managers just couldn’t believe that sales would tank in that particular month
February 1st, 2009 at 4:27 pm
GDP isn’t much of a guage during depressions.