The Consumer Metrics Institute, a consultancy with a good track record of year-ahead economic predictions, is out with its analysis of 3rd quarter GDP. By and large it’s pretty grim. Some excerpts follow without comment, since the main points pretty much speak for themselves:
In their second estimate of the third quarter 2011 GDP, the Bureau of Economic Analysis (BEA) revised the headline growth number downward by over a half percent to an annualized growth rate of 2.01%. The real story within the data, however, was that compared to last month’s “Advance” estimate the new report showed substantially weaker commercial fixed investments while the draw-down of inventory levels was more intense — putting the new numbers for third quarter aggregate commercial GDP into net contraction. In general consumer contributions were slightly weaker, while a substantial downward revision in imports somewhat softened the bad news in the headline number. Meanwhile, the public’s per-capita disposable income continued to shrink — but at a newly revised and sharply greater rate.
As usual, this revision to the prior month’s report does not reflect actual changes in the economy, but rather a month’s improvement in the BEA’s understanding of what was happening in the prior quarter. As such it tells us as much about the BEA’s “guesstimating” processes as it does about the economy.
Among the notable items in the report:
– Aggregate consumer expenditures for goods was revised downward slightly to a +0.30% annualized growth (previously reported to be +0.35%).
– The annualized growth rate for consumer expenditures was also revised downward by 0.05%, and is now estimated to be at 1.33%.
– The growth rate of private fixed investments was lowered by 0.15%, with the new number coming in at 1.45%.
– The draw-down of inventories is now nearly a half percent worse than previously reported, pulling -1.55% from the headline annualized growth rate. Conventional wisdom is that this bodes well for the economy in the future, since production will presumably have to eventually ramp-up to replace that lost inventory.
But in fact there are a number of wildly conflicting ways to spin this inventory number:
– Production has lagged demand, with factories struggling to keep up with increasing demand (unfortunately implausible given the anemic consumer growth numbers mentioned above);
– Factories are reducing inventories in anticipation of weakening demand (plausible);
– Inventory levels were ridiculously high to begin with (implying that much of the “recovery” was wishful thinking; again plausible);
– Factories have simply cut production costs by cutting production levels (thereby inflating bottom lines without the benefit of increasing commerce; highly plausible);
– Or our favorite: the BEA’s deflaters have shot them in the foot again (with deflating commodity prices “shrinking” inventories even as physical inventories remain largely unchanged; also highly plausible).
Of the five spin scenarios outlined above, the only positive one is also the least plausible.
– Total expenditures by governments at all levels is now reported to be very slightly contracting, continuing a string of four quarters of contraction. This number masks a duality in state and local spending levels, where “consumptive expenditures” (i.e., operating budgets) continue to shrink but are partially offset by increasing investments on infrastructure.
– Exports are now reported to be slightly higher relative to the previous estimate, raising the contribution that they made to the overall GDP growth rate to +0.58%.
– Imports dropped substantially compared to the previous “Advance” report, and are now removing only -0.09% from the growth rate of the overall economy (previously this number was -0.34%, a full quarter of a percent worse for the headline number).
– The annualized growth rate of “real final sales of domestic product” was revised up slightly to +3.56%. This was the result of the higher draw-down of inventories offsetting the generally weaker numbers shown elsewhere.
– Working backwards from the data tables, the effective “deflater” used by the BEA to offset the impact of inflation was 2.49%, essentially unchanged from the previous report. Again, unlike past quarters this number is generally in the same ball-park as similar data from the BEA’s sister agencies — which have more tightly tracked the impact of gasoline and grocery costs over the past year and a half. Substituting the line-item appropriate (CPI or PPI) current inflation rate published by the Bureau of Labor Statistics (BLS) causes the “real” GDP growing at a 2.46% annualized growth rate, somewhat higher than the official headline rate.
– Perhaps the most negative item among the revisions is in per-capita disposable income, which was revised sharply downward and is now reportedly shrinking at an annualized -2.1% rate during the third quarter (revised from a -1.7% in the previous “Advance” estimate). If you are looking for one line item that largely explains the mood of the general public, this is the one to monitor.
Summary
This report does not bode well for a number of reasons:– The headline number, at face value, is anemic — especially given that we are now six quarters into a “recovery,” when numbers well north of 3% should be expected.
– When compared to month-earlier data, this set of revisions again tells us that the BEA has initially been misreading the economy with an optimistic bias. This follows a trend that is best exemplified by the massive downward revisions to the numbers for the “Great Recession” announced by the BEA this past July. The problem, of course, is that it is not just the public that looks at this data — in principle the data exists primarily to inform policy makers. We’re not sure that it is in the best interests of the economy to have policy makers always looking through rose tinted glasses.
– The numbers would be worse if not for a substantial drop in the impact of imports. Weakening consumption of imported goods may be positive for the BEA’s massive GDP spreadsheet, but we’re not convinced that it signals a strong economy either domestically or globally.
– The contracting per-capita disposable income not only explains the public’s mood, it is a bad omen for holiday spending and any hope that this “recovery” (such as it is) has long to live.
In short, the BEA reports that growth is poor by historical “recovery” standards and that consumer disposable income is contracting at a significant rate. And other factors in the report (including weakening demand for imported goods and factories lowering inventory levels) indicate that overall levels of commerce are not nearly as good as the headline number might indicate. This is neither a ringing endorsement of an ongoing “recovery” nor a sign that consumers will be the engine of organic growth necessary to sustain one.
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{ 17 comments… read them below or add one }
I rather prefer John Williams’ take on the official GDP numbers: “They’re a sham…”
Such is the schizophrenic nature of the world economic system that US Bank credit ratings are falling while the Dow is on a holiday tear. The system looks good on the outside, but it’s hiding a cancer: http://djia.tv/press-tv/top-us-banks-credit-ratings-fall/
Nice analysis, thanks for that!
The conclusion one must come to, not only from this info. but many others is simply—-it’s time [perhaps past time] to prepare to rely on oneself for EVERYTHING. The government will be unwilling or unable to provide much of anything soon. It’s time for real men to stand up and be counted to provide for their families. The 1800s are back———————————-
Yeah, have to agree with bob on the ‘rely on oneself’ comment. the Tea Party has had a virtual veto over the House of Representatives’ actions for a year now, and they haven’t cut spending one penny. and that is the so called ‘conservative’ bunch, lol.
I wouldn’t blame the people who came out to the tea party rallies, Jason. They stood up for what’s right. The problem is the complete corruption (read: money as cocaine) in America. The real conservatives still have a fight. This election is so important that I’m voting for Ron Paul even if he runs as an incumbent. Voting in Romney, et al, you might as well vote for Obama. More wars, and more Federal Reserve creating of trillions of dollars to give to their cronies in the banks.
Can you hear those planes flying overhead on their way to impose a “no-fly zone” in Syria? Just as Li’l Georgie boy the spend-thrift did in Iraq, Obama does as he is told. The banks own this country and they’re going to defend their U.S. dollar hegemony to the last American. Wouldn’t be surprised if they try to start a military draft after the elections – no matter who wins.
Self Reliance! What a concept. Gerald Celente just got a lesson i
in it from MF Global. If he can get caught out there, it can happen to anybody.
I think some folks (not you necessarily) have been too hard on Gerald Celente over his futures loss. He was doing what everybody’s been advocating– taking delivery of physical metals, working to expose the looming shortfall at the exchange– and when the rule of law broke down people like Max Keiser laughed at him and said he should’ve known better. But didn’t we all want the gold and silver bugs to take those deliveries, to deplete the Comex and break the paper game and all that? I’ve heard guys advocate taking delivery for years now, and that’s just what Celente was doing.
That said, it shows you never know what rule of law is going to break next. The unthinkable (like this outright theft from accounts) has to be considered. Still, my favorite investment (buying junk dimes with cash & walking out with my anonymity intact) seems fairly foolproof. The dimes seem an unlikely counterfeiting target.
Combine falling numbers like these with
teen-agers who can’t tell right from wrong because their schools have been
bullied into soft-pedaling morals, for
fear of offending somebody, and you
have all the ingredients for a first
class megaton blowout of society.
You’ll know we’re finished when the
division of labor begins to shrink.
Shortly thereafter, farmers will cease
selling to markets (because the paper money they get will be suspect) and
will simply grow enough for their own
needs. And this, not disease, is what
will cause the population crash that
history stones will record for poster-
ity. (There’ll be no books; they’ll
have been burned for fuel long since.)
Mother Nature’s experiment with the
Big Brain is now hanging in the balance.
I wouldn’t put money either way right
now. WGT
@W G Thompson
(Quote): ”Shortly thereafter, farmers will cease selling to markets (because the paper money they get will be suspect) and will simply grow enough for their own needs.”
What farmers? The vast majority of farms in America are owned and operated by ”Corporate Conglomerates Inc”, not ”Mr & Mrs Family Farmer.”
However, for a variety of other reasons, there is a real possibility of worldwide famine… Thus your population concerns may prove valid anyway.
I can foresee increases in ”home” (aka ”DIY”) farming, which will undoubtedly be undermined by the monopolistic supply of GMO seeds — a-la Monsanto. Anyone concerned enough about this prospect should already be stocking up on Heirloom Seeds… while they’re still available.
One has only to read about what happened to the farmers in Argentina in 2003 during their blow-out to know they’ll be set upon by jackals. Self-defense will come down to alliances. If you’re alone, you’re finished.
A valid perspective on the souring mood were seeing.
Yes at the moment everyone is feeling a deflationary wave roll through.
Assets across the board are down, dollars and treasuries are up, hmmm.
Your right John, about the mood – the population is perhaps transitioning from denial to anger even as prices might be cooling a bit. However the population is a plethora of viewpoints with limited ability to alter their beliefs and expectations. Heck, we’ve given up our Constitutional freedoms right and left and 90% don’t even know or care to know.
The game at the big table is in for a surprise tilt when the pressure on the euro subsides, and money flows from treasuries back to assets across the board. A memorable rally could run for a bit, but circling back to
this article, such a rally ignores the conditions on main street, until they matter. It is a just a reaction rally The pin for this rally will be rising interest rates as treasuries fall from these “Icarus” heights, and the interest payments on gov. debt heads rapidly out of control.
This may not be how it happens, as there are other events that could start a selloff in treasuries, and a scenario where the euro falls in value seems to be even more justified as the world dithers. This would help European assets and relieve the tension (assuming Greeks leave, and Spain and Italy head into their popularly supported austerity – boosting confidence).
Junk dimes are great, but don’t end up with a barrel of ‘em!
I know its hard to buy when everything is headed south and silver has been particularly punished; but one dime from my high school days was recently worth a $4 gallon of gas. Its a good way to preserve your savings, and the time to buy is now, near a low. Buy some more if you can catch it lower- avoid scams and counterfeits – look for the lowest price over spot, which is generally junk silver. Its not junk, its pre65 US dimes, quarters, halfs, and dollars that are 90% silver. They are used ,worn coins with no collector value, so they got the name junk.
How long until Americans realize they’ve been bent over by their own corporations? US jobs are not coming back. Factories will not re-open, because they are all now in China. US corps started outsourcing and off-shoring jobs to China shortly after they were able to convince the US government to dismantle trade and investment regulations.
Corporations all thought this was great since they could employ people in China for 10cents/hour and still sell the stuff for the same price back home in the US. “Penny Stock Style Employment.” Pay little, gain tons.
How long could this continue? It will continue for as long as the consumer and US government could continue borrowing.
Time is almost up.
I own a factory in China and wage rates were probably #10 on the list of why I moved there. Wages are a relatively minor part of my overall costs. The ‘dismantled regulations’ you speak of is a farce. The onerous US regulatory climate is the #1 reason I relocated. Ever try dealing with the EPA? I agree the factories won’t re-open but don’t blame the corporations, blame the gubmint.
BTW – my employees make a lot more than 10cents/hr and it’s growing. Experienced engineer level near 25k/year now.
Hey Lanchende. You keep believing that crap.
What a thoughtful response.
I however, live in the real world
So has anyone got any constructive ideas on how to lift USA and European and New Zealand GDP ?
Aside form bringing back tarifs (no longer possible ?) I think the only things is to wait until Asian wages rise to say twice what they are now. Then it will make sense to manufacture some goods in the west.
But as Lanchende says Asia has other advantages, no health and safety regs, no environmental regs, no labor rules.