More on GDP and Economic Outlook
It's been quite a week for economic data with the release of preliminary estimates of Q407 earlier this week and monthly payroll numbers today. Given the slew of data arriving all at once we're going to put up several posts parsing it out, starting with the GDP data. As you may recall the headlines for the last several quarters have focused on annualizing QtQ changes and getting everybody excited - though to judge by the markets which seem to be in the midst of that bear market bounce we've been talking about. The question is is the bounce warranted by the underlying economic fundamentals ? (UPDATE: bounce, bouncing around so far....)
As usual we prefere YOY% changes for reasons we've gone into several times. So the headline
numbers for GDP for Q2-Q4 were 3.8%, 4.9% and 0.6% respectively. The first two of which got everybody all excited about how good things were. The actual annual growth, using the YoY approach, was 1.9%, 2.8% and 2.5% respectively. Neither as good as the headlines had it, as usual, nor bad. And when you look at the accompanying charts the trend is definitely not favorable. The first sub-chart shows GDP, PCE and Investment in real terms. Notice Consumpton (PCE) continues its' gradual downtrend while GDP and Investment have recovered their big dips from earlier in the year to get back on a slowing downtrend as well. Congratulations !
Since Investment is the accelerator and the Wild Card here the second sub-chart breaks it down into its' three main components. Residential, Structures and Equipment/Software. RI continues to accelerate a dive off the cliff and since it's a major component and ALWAYS leads cyclical turns that's a critical obeservation. Structures show a great continued uptick but are in fact both the smallest part and are playing catchup from a severe downturn in the last recession. Real business spending upticked but again merely returns to a downtrend. So we're definitely not in a recession but perhaps the key word is yet. That depends on Consumption.
The GDP, et.al. data is quarterly and definitely reinforces the notion of a continuing slowmotion
slowdown. Yet the key engine of growth, Consumption, did very well in Oct/Nov which means that the drop in PCE was the result of a major drop in monthly consumption in Dec. Or put another way we'd better take a look at the high-frequency monthly data. But before we do that let's take apart the structure of the GDP changes by looking at its' major components in the next chart set and postpone the h.f. data till later.
The accompanying chart is an approach we've used before to look at the YOY changes and patterns in the major components of GDP: Consumption (Nondurables, Durables, Services), Investment (Capex, RI), Inventory, Net Exports and Gov't. The chart shows YOY absolute changes in the components, their aggregate contribution, i.e. sums 'em up on a rolling basis, and the YOY% contribution of that aggregate.
In the first sub-chart you can see 2of3 major Consumption components are declining while Capex was a big boost, Inventories had a smaller decrease but Net Exports contribution decreased. In the second sub-chart, which in effect shows how each component adds or subtracs to the YOY change in GDP, their relative impacts are much clearer. The big kahuna, the engine, Consumption has a declining total contribution. Really....really not good.
For all practical purposes Capex helped things remain steady but, as our earlier detailed dissection of the nature of business cycles showed, Capex is a lagging variable and we can expect it to start declining. Meanwhile of course RI still a big chunk out of things and so much for decoupling. As we've also discussed before. These interpretations are strongly reinforced when you look at the YOY% contributions. There's been a large, shapr drop in consumption. Period, end-of-story. We're in an accelerating slowdown that looks to be accelerating. So we come back to the key question - what does the H.F. data tell us ?
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