Revisiting GDP

When the Q4 2006 GDP data was initially released at 3.5%, we noted that it did not comport with the data we were seeing elsewhere. And in January, we approvingly referenced Caroline Baum’s analysis (Q4 Data Doesn’t Add Up).

Then last week, the Commerce Department released their data on Inventory levels. Based on that, it turns out that our prior criticisms of GDP were dead on:

"U.S. wholesalers’ inventories took the biggest tumble in more than
three years during December as overall demand for their goods raced
forward.

Wholesale inventories decreased by 0.5% to a
seasonally adjusted $393.76 billion, the Commerce Department said
Thursday. November inventories rose by 1.1%, adjusted from a previously
reported 1.3% climb.


The 0.5% decrease in December wholesale inventories surprised Wall
Street, which expected a 0.5% gain. It was the sharpest drop since 0.6%
in May 2003."

Inventories being drawn down are different than actual production of goods. Hence, this is why the Commerce data overstated Q4 GDP by as much as 75 basis points (my estimate) to 100 basis points (JPMorgan’s est.).

That’s prior to the release of the Import /Export data, which as the WSJ noted,  was huge: 

"The chasm between what America buys from overseas and what it ships abroad got wider during December for the first time in four months, due mostly to a resurgence in oil prices. The Commerce Department said the trade shortfall increased 5.3% to $61.18 billion from $58.12 billion in November. That capped a year which saw the deficit swell to $763.6 billion, a 6.5% increase from 2005, and it was the fifth straight year in which the trade shortfall trampled a previous annual record."

Have a look at these two charts. The first is the official Commerce Department data, based only on the prelim GDP. The second chart reflects our new estimates based on the latest inventory data — but not the increase in Imports:

Original Release:

Gdp_incl_q4_prerev_1

The original release (above) gives the impression of an economy moving sideways, growing at a consistent rate between 3 and 3.5%. This is consistent with the soft landing thesis many of the strong Bulls believe in.

Reality check.  With the new Inventory data from Commerce, however, that rosy scenario fades away. First, most of the big GDP pop came when rates were at generational lows and were that way for a year. This artificial stimulation is what gave the economy its pop: 

GDP (expected revision)
Gdp_q4_rev

 

Using the most recent J.P. Morgan estimates (chart 2), we see that GDP has actually been on the downslide since peaking in late 2003/early 2004.

If we were to add the Import/Export data to this, that dings this even further downwards — We are looking at a GDP of potentially 2-2.5%.

If the economic deceleration continues on (as I suspect it will), there is a very real possibility we will see GDP slip to 1-2% by mid 2007.

Goldilocks has left the building . . .

>

Sources:
MONTHLY WHOLESALE TRADE: SALES AND INVENTORIES
U.S. Census Bureau News, DECEMBER 2006

http://www.census.gov/mwts/www/currentwhl.html

Trade Winds
TIM ANNETT    
WSJ, February 13, 2007 12:45 p.m.
THE AFTERNOON REPORT
http://online.wsj.com/article_print/SB117137119901207152.html

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