Adventures in confirmation bias: The GDP data this morning was a deep sigh of relief for those people who fear a recession may be coming.
I don’t have that sense of relief. Perhaps its my own bias, but the details of the GDP report reveal not an organic growth period in a healthy recovering economy, but rather a tepid post-credit crisis expansion highly dependent on government largesse and Federal Reserve accommodation.
It is about what we should expect: Below-trend growth, as the economy gradually heals, individual and bank balance sheets slowly improve, and the excesses of the prior cycle get wrung out of the system.
Consider the major factors within this GDP report:
-Residential construction rose 14.4%. Housing is a bright spot; with sales and prices increasing. However, this has been artificially goosed by the Fed’s ultra low rates and purchases MBS. Mortgage rates are at their lowest levels since WW2, and foreclosure abatements have created an appearance of reduced distress sales. So this portion of GDP is positive but artificial; it added about 0.3% to GDP.
-Defense Spending rose by 13% — this added 0.6% to GDP. This is not what we want driving GDP, but rather, Ii prefer to see private sector improvements.
-Business Spending remains soft. Ignore the nonsensical “Uncertainty” trope; if demand were there, businesses would add personnel and make CapEx investments as necessary. (idiotic rationalizations spoon fed to the gullible do not count as intelligent economic analysis to me — and that includes “uncertainty”).
-Slowing Exports (down 1.6%) took a few bips off of GDP.
-Midwestern Drought I do recognize that the probably whacked almost half a percentage point from overall GDP numbers (0.1% times 4Qs for an annualized 0.4%).
By my numbers, half of the GDP gains came from Fed/Uncle Sam. The slowdown in Europe and Asia are pressuring economic activity; the drought took away some of the gains, and without that, we should have seen some more strength.
Overall, this report suggests that we are not yet in recession, yet, but are barely above stall speed — more like a 1.5% GDP ex-government interventions and drought. The improvements we are seeing seem to be driven mostly by Fed and government intervention.
The key question, in light of the mediocre earnings season, is how long the propping up can continue.
Sources:
GROSS DOMESTIC PRODUCT: THIRD QUARTER 2012 (ADVANCE ESTIMATE)
BEA, October 25, 2012
http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_adv.pdf
Category: Economy, Federal Reserve
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
Frankly I’m shocked with today’s 2% figure. Where’s Jack Welch this morn?
With this week’s data, TRI gauged the economy troughed @ 0.2% in late August and had rebounded to a 0.6% pace in Sept (Q3). So I’ll be anticipating downward revisions (after the Election)…
Early data has October @ 1.1% and TRI forward-looking data senses absolutely no sign of the so-called fiscal cliff calamity.
TRI chart: http://trendlines.ca/free/economics/RecessionIndicatorUSA/USA-TRI.htm
Real growth will require real income increases for the consumer class. That means the investor class will have to share their income growth – or in other words stupid selfishness among the rich will have to yield to getting the big picture. The other way to increase aggregate demand is to increase collective consumption (government spending). That seems even more unlikely. Maybe we do have to go full “South America” before the red state morons stop driving their pick up trucks to the pools to vote republican.
BR. The final question is indeed key. How long can the government prop up the private sector?
Haven’t they been doing that in some way shape or form since the industrial revolution?
I don’t think there is actual organic growth in our system…I can’t come up with one industry that does not benefit in some way shape or form from government intervention.
If it isn’t the fed goosing things (as they have been for 30 years) then it is government subsidies…
I guess the real question is…how much “organic” growth do we need.
Along those lines, revenues count more than anything right? I mean EPS can be manipulated multiple ways, but Revenue is revenue…no accounting gimmicks can really be used to goose the top line (maybe that’s why it’s the top line).
I think a great study would be to correlate revenues with the market…maybe do some sort of Price/Sales chart…i know Ken Fisher is a big fan of P/S…but not sure i have ever seen a chart like Schiller’s P/E using P/S.
If housing and construction continue to increase, there will be a multiplier effect because that is the area where the greatest unemployment occurred. I’d put more faith in a cause-and-effect story like that than I would in mysterious cycles.
Housing construction needs to increase to stop the silly prices rises of the last year. Supply is far to low in my region.
Remember, 2% growth is what 4% growth was 100 years ago. This fact eludes people.
“The key question, in light of the mediocre earnings season, is how long the propping up can continue.”
My guess is that the “propping up”, in the form of deficit spending financed by QEternity, will continue until employment is acceptable.
I suspect they can create as much nominal GDP growth, with better employment, as they want… whether or not this will result in real GDP growth will depend on how they calculate inflation.
well pintelho, once consumes (buyers) actually have income growth again, growth can happen. but so far we have been almost 30 or 40 years without much if any real income growth among the vast majority of buyers. so we end p with bubbles trying to replace that. like a credit and housing bubble. that allowed the consumer to buy more than they could have with just their income. but easy credit is dead (for now) and housing is a ghost of what it was
so until income growth for the 99% returns, that only leaves the only other buyer, the government, to grow the economy.
you might question that there are only 2 buyers but consider business will not buy any thing or hire any body unless they can sell to a buyer. otherwise they aren’t a business. and for business, employees are a necessary evil, not some thing they really want to do.
Picking a nit…
“Slowing Imports (down 1.6%) took a few bips off of GDP”
Should read “Slowing Exports”.
Imports are a deduction from GDP. Fewer imports = higher GDP
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BR: Yeah, thats a brainfart. I’ll fix . . .
The deflator was 2.87%, substantially higher than CPI-U over the same period.
The CPI-U share of medical is about 7%, and total medical is about 17% of GDP.
I wonder what the medical share of the deflator is? Does it take hedonics and reverse hedonics into account?
“The key question, in light of the mediocre earnings season, is how long the propping up can continue.”
The propping will continue until morale improves … or something like that.
How long have the Japanese been at this game?
“-Business Spending remains soft. Ignore the nonsensical “Uncertainty” trope; if demand were there, businesses would add personnel and make CapEx investments as necessary.”
This seems to discount the idea of forecasting…not every business has the luxury of waiting until they have a backlog of orders in order to make capital expenditures. For example, an additional widget production machine that takes 3 months to bring online (decision to order to first unit produced) would make sense if sales *growth* was the same as or better than last year but not if sales remained the same or declined. Thus if the decision maker feels that next year will be no better than now it the purchase may be delayed.
Other scenarios: high fixed cost items with a long return timeframe, long lead items, or a company that could use another widget machine now but buying a new one doesn’t meet an internal rate of return hurdle due to forecasted growth or margins.
well.forecasting would be based on how customers will act/react. which is still uncertain from day to day. but if the one makes the decision on what might happen out side what impacts their customers, they are not being very aggressive. and considering that most US businesses have been on the side lines for the most part since 2001, they must not really have any faith in any forecasts, and or they have over weighted the down sides
or maybe just maybe they have figured out that they have hit the customers so hard, that growth will stop just because potential customers have no incomes to buy any more. either that our business leaders are just wimpy
“Defense Spending rose by 13% – this added 0.6% to GDP. This is not what we want driving GDP…”
Except it was all the rage during both the Reagan and Chimpy Bush terms.