The latest data forces me to revise my 50% possibility of a recession in 2007/08 up to 60%. GDP for Q4 ’06 is likely to be between 0.5% – 1.5% (or worse, if Holiday sales keep trending softer).
As far as the Fed, this data suggests that the jawboning about inflation will remain just that — while we still expect the Fed to cut before 2007 comes to an end, the odds of a hike anytime soon have just dropped significantly.
Given the awful PMI and ISM data — they both broke the key "50" demarcation — one may be wondering how GDP data ended up getting revised upwards. The answer comes from the way GDP is constructed. But even more importantly, observe whichthe components that increased the revised GDP — these are symptomatic of a slowing economy:
Government spending (0.05%)
Inventory Build (0.26%)
Exports were revised 0.2% lower.
Consumption was revised 0.14% lower
Inventory build, government spending and imports, was responsible for virtually all of the 0.6% upward revision in GDP. Consumption, 70% of the US economy, is slowing.
Why are Businesses inventories increasing? Some pundits have claimed this is a bullish sign, an "anticipation of increased demand." I doubt this. We have seen recent CEO surveys which point to major negative sentiment amongst the usually cheery Execs; Durable Goods tumbled 8%, and Housing and Autos are likely already in a recession. My guess is that Just-in-time-inventory is easier to ramp than it is to slow down.
And while Reuters reported that "Business spending on inventories rose, increasing sharply to a $58 billion rate from the $50.7 billion earlier estimated." Inventories builds have increased at a faster than usual pace — implying that this was (whoops!) unintentional.
Given the drop in both Durables and Capex, I am somewhat incredulous over Business spending being revised upward to show a 7.2% gain (versus 6.4% advance)
Another edition of our new series: Blog Spotlight.
We put together a short list of excellent but somewhat overlooked
blog that deserves a greater audience. Expect to see a post from a
different featured blogger here every Tuesday and Thursday evening,
Second up in our Blogger Spotlight: Michael Shedlock and Mish’s Global Economic Trend Analysis.
Mike is one of the editors of The Survival Report, covering stocks and
the economy. He also writes for the Daily Reckoning, and co-edits
Whiskey & Gunpowder. He also runs stock boards on the Motley Fool,
Silicon Investor, and TheMarketTraders. He is an avid photographer,
when not writing about stocks or the economy, with over 80 magazine and
book covers to his credit.
The following post is an email from Michael J. Dorff, a mortgage broker with Trans World Financial about the state of affairs in Orange County California. Monday evening I will have an update from Mike Morgan to share:
Category: Blog Spotlight