The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

The S&P Finacial sector swings from peak to trough and back (via Ron Griess of The Chart Store) . . .

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Fascinating stuff . . .

Cool infographic by Bryan Christie showing all Earth missions to Mars:

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Laughing Squid via boingboing

Full Committee Hearing

Bear with me, while I get this fixed

Ok, a quick review of GDP is revealing of a few things of interest. Let’s start with the data, and go on from there. BEA reports:

“Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.5 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent.”

We get the usual disclaimers that this is an “estimate based on source data that are incomplete or subject to further revision” (Next GDP update is November 24, 2009).

Where did the growth come from?

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased…

Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change. Final sales of computers subtracted 0.11 percentage point from the third-quarter change in real GDP after subtracting 0.04 percentage point from the second-quarter change.

The 1st question to ask about GDP is the degree of inorganic/artificial gains. As the above paras suggest, much of the improvement is where the government is spending, incentivizing, or bailing out various sectors: Autos, Residential RE, and Fed spending. As expected, Inventory reduction helped, and unexpectedly, increasing imports hurt.

A large chunk of the gains — 1.66 percentage points — came from Car sales in the form of cash for clunkers; this will not be in the Q4 data.

Home building soared 23.5% — reflecting a combination of zero percent interest ratyes (ZIRP) and 1st time homebuyers tax credit. That was good for another 0.5 percentage points of GDP.

Well over half of the gains are therefore government related.

Also of note: Nominal GDP was below forecasts, thanks to a surprise 0.8% gain in the deflator (That also added to the REAL GDP figure). Hence, a chunk of the gains are pure inflation.

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Source:
Gross Domestic Product (GDP) Q3 2009 (ADVANCE ESTIMATE)
BEA, OCTOBER 29, 2009

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

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Traders again bought stocks on Wednesday’s open but an unexpectedly soft New Home Sales report chilled bullish proclivities. September New Home Sales declined 3.6% to 402k; 440k was expected. And once again, the previous month’s data was revised lower, from 429k down to 417k.

Though inventories are reported at 7.5 months, this is an illusionary number because there are beaucoup homes in the hidden inventories of investors, banks, mortgage holders, builders, etc. that are not listed.

Mark Hanson: New Home Sales just can’t get going despite foreclosure moratoria and national mortgage mod initiatives that have kept competing low-end inventory levels historically low and demand for existing houses from low-end buyers throughout the 2009 purchase season up.

Not Seasonally Adjusted, only 31k New Homes were sold in September, slightly greater than 1500 units per day. This was down a sharp 11.4% YoY and 16.2% MoM – the normal Aug to Sept decline is closer to 10%. To keep the 1500 daily sales in perspective, today there will be 2000 foreclosure starts in CA alone…The report made for the weakest September since 1981.

Another factor that depressed stocks on Wednesday was: Goldman lowered its Q3 GDP forecast to 2.7% from 3%. GS see 3% Q4 GDP and weaker 2010 GDP. GS’s day-before-release revisions to its NFP forecast the previous two months were bull’s eyes, so traders believed that Goldie knows something.

Due to the trillions of dollars thrown at or pledged to the economy and financial system many pundits thought GDP would surge 4% to 6% in Q3. Now, reality, which is evinced in jobs and income, is weighing on the economy, sentiment and finally stocks.

If GDP is less than 3% for Q3, people will have to readjust Q4 and 2010 GDP projections. This was the main factor in yesterday’s stock decline.

Read the rest of this entry »

GDP in Q3 grew 3.5%, faster than the consensus of 3.2% but Nominal GDP was below forecasts as it grew 4.3% vs an expected gain of 4.6%. It was thus an .8% gain in the deflator vs expectations of a 1.4% rise that helped in part lift the REAL GDP figure above estimates. Personal Consumption did bounce back by 3.4%, .3% more than expected and helped out by the CASH program as spending on durable goods rose by 22.3%. Helped out by the home buying tax credit, residential construction added .5% to GDP, the 1st time its contributed to GDP since Q4 ’05. Spending on equipment and software rose 1.1%, the 1st increase since Q4 ’07. Trade was a drag as imports grew faster than exports. Inventories fell $130.8b, less than the Q2 decline and thus added .94% to GDP. Real final sales, which take out the inventory influence, rose by 2.5%. Federal Govt spending rose 7.9% offsetting a drop in state and local spending.

Initial Jobless Claims totaled 530k, 5k above expectations but were little changed with last week. Continuing Claims fell again and to the lowest level since March but much of that decline has more to do with people exhausting the initial 26 weeks of benefits rather than finding a new job. There was however a drop on the week in the amount of people receiving Emergency Unemployment Compensation and Extended Benefits (off a big upward revision to the prior week) but there is also a high probability that it’s due to the exhaustion of benefits. The monthly payroll data will determine by how much as we hope that those running out of benefits find new jobs. The uncertainty in this is why Congress is debating another extension of unemployment benefits.

I am on the road as this data point comes out, but use comments to update

Real GDP – Q/Q change  consensus is 3.0 %, the range is 3.0 % to 4.0 %.

Just as the high in the housing industry from the home buying tax credit wears off, Congress is back with another injection with both parties bringing the drugs. It doesn’t matter if it makes economic sense or not, the temporary high feels so good and who cares what the long term implications are. Mark McGwire and Jose Canseco would be proud, as would Pablo Escobar, may he rest in peace. Also, the Japanese politicians from the 1990′s aren’t feeling so lonely anymore and in fact I think there is a huge autographed picture of the Japanese LDP party in the Congressional cafeteria. My point is, by not letting the economy heal on its own and quickly delever will only prolong the agony and kick the can further down the road as the bills will have to get paid anyway.

The euro is rebounding after 4 days of declines after German unemployment unexpectedly fell for a 4th straight month in Oct and the unemployment rate fell to 8.1%, .2% less than expected and at the lowest level since March. Also, Euro region economic confidence rose to the highest since Sept ’08 and was almost 2 pts above forecasts and a retail sales index in the region rose back to 50. New Zealand didn’t follow the RBA and kept rates unchanged at 2.5% while Russia cut its benchmark rate by 50 bps to 9.5%. Q3 GDP in the US is expected to be 3.2% annualized, the first positive reading since Q2 ’08. While the report card can be seen as old news as the economy is already 1/3 of the way thru Q4, it will give us a staring point from which Q4 GDP began. Initial Jobless Claims are expected to total 525k, down 6k from last week.

Today, we are going to get what is likely a positive GDP. There are a number of factors that are contributing to the improving data point, not the least of which are the inventory liquidation, and the faster fall of imports than domestic consumption.

We’ll dissect the numbers later this morn, but a positive GDP raises the following question: Is the Recession actually over?

We know that the Great Recession is over — the panic and expectation that the economic world was coming to an end probably ended sometime in March or April.

But is the “regular recession” over?

We begin looking at the NBER definition:

“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.” (emphasis added)

That definition raises an interesting question. If we look at the 5 factors NBER considers — GDP, real income, employment, industrial production, and wholesale-retail sales — its somewhat ambiguous  to say unequivocally that the recession is over. We are still losing an inordinate number of jobs (250k+ / mo), industrial production has improved, but is soft, retail sales have been mostly flat, and real income has been negative for a decade.

Perhaps the bimodal definition the NBER uses is outdated: Read literally, their definition suggests that there are only two options, either the economy is expanding or contracting.

It might be worthwhile to consider a third possibility: None of the above. The economy might have reached a state of stasis — a balance where it neither expands nor contracts.

I believe that the NBER was too quick to declare the 2001 recession over. The job loss and lack real income improvement was offset by the economic activity that the ultralow rates caused — in terms of credit driven activity in Retail, Housing, and on Wall Street.

I assume that the NBER believes that normally, the transitional phase of the economy from recession to expansion is quick enough that it needs no specific name or even any definitional recognition.

That might not work so well this time.

Given the current 33.1 hour work week, we might not see a real improvement in employment for years, as firms simply ramp up worker hours towards a fuller 40 hour work week, as opposed to hiring.

Perhaps when the NBER releases their next Memo from the Business Cycle Dating Committee they might consider refining their definition (or at least acknowledging) the current, and somewhat unusual historic anomaly of an Extended Transition Phase.

GDP out at 8:30 am

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Previously:
The Great Recession is Over! Long Live the Ordinary Recession . . . (July 31st, 2009)

http://www.ritholtz.com/blog/2009/07/great-recession-over-long-live-ordinary-recession/