News Interrupt: Real GDP and a Tipping Point ?
Speaking of interrupt driven we were going to continue on with our orderly dissection of various enteprise earnings reports and performance outllooks. Judging by the readership stats more than one person was interested to see that sort of thing. Hopefully this won't be too much of a digression but this morning's headlines on preliminary GDP numbers, markets reactions and mis-interpretations call for it. After the break you'll find some more charts that we recommend for your consideration - translation, really study those suckers 'cause the headlines only got part of it this time and we're starting to cross the tipping point. We'll dig more into this coming weekend hopefully but let's start with a couple of headlines and snippetts for now.
- Economy gains less than expected The economy grew at a faster pace in the spring, but not quite as fast as expected, according to a government reading likely to spur further debate over whether the economy has fallen into a recession.
- Weekly Applications for Jobless Benefits Hit 5-Year High The number of people filing claims for unemployment benefits jumped last week to the highest level in five years, reflecting in large part a new government outreach effort to locate people eligible for benefits.
There's a little good news here, some worse/bad news and some missed signals, which are the really important part. Let's start with the smidgeon of good news. The headline got it right but remember this is very noisy weekly data. And for another thing there was a special effort made to make people aware of their benefits which caused a surge. When you do a little de-constructing, herein defined as taking the 4-week MA and looking at the YoY% changes you can see continuing claims continuing to creep up but the big jump is filterred out. Just for the record btw we did a comparison on Initial vs Continuing claims vs Payrolls vs Unemployment and guess what ? On a YoY% basis they're synchronous and follow the same business cycle patterns. You can use one just as readily as the others.
On the other hand, despite the market's being down, we don't think people understand what they saw in today's GDP numbers. The headline was for a 1.9% increase vs an expected 2.3% which isn't good. And Q4 was revised to a -.2% from .6% which tells you what happens as the data get better and more based on real samples than guesses. The real news IOHO is that YoY% was 1.82% and Consumption for Q1 was 1.45% and for Q2 1.34%, YoY using the real data. With the revisions in the data it looks to use as if Consumption slowed more abruptly than anybody knew, we're in the process of crossing the tipping point and nobody's blown any Rubicon-crossing bugles. In other words the number of people who'll have that information is pretty minimal. Check out the charts below and see if we make our case.
GDP YoY% Changes
YoY% changes are shown for real GDP (dark blue), Consumption (PCE - med. blue) and Employment (light blue). And yes the latter doesn't include tomorrow's numbers yet. Patience. Nonetheless take a careful look. We've been talking about the slowmotion slowdown that's been visible since '06. Well once you sidestep the dippy-do in GDP last year that trends continues. BUT....PCE appears to have turned down rather abruptly in Q407 !
GDP Component Changes 
Now here's one of our other favorite interesting and potentially confusing charts which we use over and over again. We really think this is worth your time to think thru and understand if it's still puzzling - it is for us btw after we haven't looked at it for a while. But what it shows is the YoY difference in each of the major GDP components from the Real GDP tables. There's some critical info there - Consumption was downturning and only Services were holding up...Oops. And oh btw the rebates didn't have much impact (they'd show up in No-Dur spending mostly). Dangerously and scarily though the cycle is moving ahead - Capex is down a chunk but Inventories (which are really an investment in future sales) dropped. The only thing keeping the wheels on the wagon is Trade. Much more than we knew.
GDP Component % Contribution
This is an even more interesting chart and perhaps even more confusing. It shows the % contribution of each component to the YoY change in GDP. So for example GDP was up about $209B in Q2 and PCE was up $110B, or about 53% of the total. That's really bad news because in a healthy disaster Consumption is usually 100-120% to make up for the hits elsewhere. Ouch and Oops !! Take a good luck and think thru each of the components...not a pretty picture IOHO.
In fact when you take the running total of percentage contributions by the time you get to Inventories the change is -3% !!! Without a weak dollar and that extra $100B in incremental trade we'd be pretty much in negative territory.
Now go back and review the last post on the int'l economic outlook and ask yourself how long you think that's going to hold up !
Key Implications
We may not have cross the Rubicon as yet but we're standing on the near bank and our knees are getting wetter and wetter. And for all the whining and tooth-gnashing that's been going on think about five things:
- This isn't commonly recognized, or accepted, in very many places as yet.
- As a result it's not reflected in company investment or hiring plans, economists outlooks of investment strategies.
- This means that the outlook for Q3/Q4 is deteteriorating.
- Which means that so is the outlook for earnings
- None of which is priced in.