Free Markets, Free People

growth


GDP growth: How bad is it?

Bad.

Real bad according to J.P. Morgan:

This morning we lowered our tracking of Q2 GDP growth from 1.7% to 1.4%. For some time now we have noted that our Q3 GDP call — which was already below consensus at 2.0% — had risks that were skewed to the downside.

After the latest round of data we have decided to lower our projection for Q3 to 1.5%. The strength in inventories reported this morning suggests that businesses may have got caught offsides when final demand weakened this past spring. That inventory build should weigh on production growth in the third quarter as already-cautious businesses seek to work down stockpiles. Added to this downside, the weakness in June real consumer spending will make the arithmetic for Q3 consumption a little more challenging.

Finally, the decline in gasoline prices — which had been seen as an important support to the economy — has partly reversed itself in recent weeks, thereby lessening the impetus to growth from that source. For 2012 as a whole, we are now looking for growth of around 1.7% on a Q4/Q4 basis, about the same as last year and 0.2%-point below our tracking last week. On a year-ago basis real GDP has been growing at a below-trend pace since early last year. If our forecast is anywhere near correct, that pattern will persist for at least another year, and perhaps even longer.

To reiterate:

Q2 – 1.4% growth.

Q3 – 1.5% growth

Q4 – 1.7% growth

For the year, under 2.0%.

The word “pitiful” doesn’t even begin to connote the severity of this forecast.  And note the bottom line of the JP Morgan forecast: “If our forecast is anywhere near correct, that pattern will persist for at least another year, and perhaps even longer.”

And here we are doing the usual – talking about distractions like Bain Capital.

Amazing.

~McQ

Twitter: @McQandO


The Economy: Most likely lower GDP growth, higher unemployment, flat spending in 1st quarter

Take all of the forecasts with a grain of salt given the “unexpectedness” of most economic numbers, but this gives a hint as to what to expect and it also explains why the last quarter’s GDP numbers were an illusion of growth, not the beginning of a growth trend:

The US economy continues on a bumpy road to recovery. Weaker data this week on consumer confidence, jobless claims, housing, and durable goods orders have introduced downside risks to our near-term economic outlook. We have made some minor adjustments to our GDP forecast. Fourth quarter GDP was revised up to 5.9%, with the inventory swing now accounting for 3.9 pp of growth, up from 3.4 pp. We think this “steals” some growth from 1Q. In addition, core capital goods orders and shipments were weaker than expected in January, so we are lowering our forecast for 1Q GDP to 1.5% from 2.0% previously.

1.5% growth isn’t a particularly auspicious number for those claiming we’ve “turned the corner” and are out of the recession and on a positive growth trend. It should be remembered that the last positive growth quarter before December was driven mostly by “cash for clunkers” or government spending. The 4th quarter of last year was driven by restocking inventories. Without it, the GDP is at 2%.  Unless there are consumption increases which will work to decrease those inventories, the growth for that quarter is an anomoly much like the GDP increase driven by cash for clunkers.

With consumer confidence down, housing and durable goods orders down and jobless numbers up, it doesn’t speak for an auspicious start to the year.

This next week will see some other numbers come in. If the forecasters are right (big if), then its going to be more bad news on the employment front:

The consensus is for a net loss of 50 to 80 thousand payroll jobs, and the unemployment rate to increase slightly to 9.8% (from 9.7%).

Today’s Personal Income and Outlays report (PCE) is mixed:

Personal income rose $11.4 billion, or 0.1%, less than the 0.4% expected, while personal consumption expenditures rose 0.5%, ahead of the 0.4% increase expected: So income’s rising slowly, but Americans are still spending more than expected.

The PCE index for the month posted a 0.2% increase, most of that because of energy and food; absent those items, the PCE index rose less than 0.1%, the report showed.

So the PCE index saw a slight increase above expectation but that was driven by necessities (food, energy) not the consumption of goods.

The ISM Manufacturing index released today also disappoints:

Activity in the manufacturing sector expanded for the seventh consecutive month in February, according to a report released by the Institute for Supply Management on Monday, although the pace of growth slowed by more than economists had been anticipating.

The ISM said its index of activity in the manufacturing sector fell to 56.5 in February from 58.4 in January, with a reading above 50 still indicating growth in the sector. Economists had been expecting the index to show a more modest decrease to a reading of 58.0.
Activity in the manufacturing sector expanded for the seventh consecutive month in February, according to a report released by the Institute for Supply Management on Monday, although the pace of growth slowed by more than economists had been anticipating.

The ISM said its index of activity in the manufacturing sector fell to 56.5 in February from 58.4 in January, with a reading above 50 still indicating growth in the sector. Economists had been expecting the index to show a more modest decrease to a reading of 58.0.

While snow is being blamed for some of the decline, but only in its depth, not the fact that there was a decline.

And the final Monday report is the Construction Spending Report for January was released:

Spending on U.S. construction projects fell at a seasonally adjusted rate of 0.6% in January, the third consecutive month of declines, the Commerce Department estimated Monday.

The decline in January was wider than the 0.5% drop that economists surveyed by MarketWatch had been expecting. December’s outlays fell an unrevised 1.2%.

In January, private residential outlays rose 1.3%, while private nonresidential outlays fell 2.1%. Public outlays also fell, off 0.7%.

During the rest of the week, you’ll see the following:

On Tuesday, the various manufacturers will release light vehicle sales for February. The consensus is for a decline to about 10.4 million on a Seasonally Adjusted Annual Rate (SAAR) basis from 10.8 million in January. Sales for Toyota will be closely watched. Also on Tuesday, the Personal Bankruptcy Filings estimate for February will be released.

On Wednesday, the ADP Employment report and ISM Non-Manufacturing index (consensus is for a slight increase to 51% from 50.5%), and the Fed’s beige book will all be released.

On Thursday, the closely watched initial weekly unemployment claims, productivity report, factory orders, and pending home sales will all be released.

And on Friday, the BLS employment report, Consumer Credit (more contraction), and another round of bank failures (I’m thinking Puerto Rico will make an appearance).

The good news, if there is any, is that inflation expectations haven’t really reared their ugly head to this point, meaning right now inflation is under a modicum of control and not rising appreciably. Of course that could literally change in a heartbeat, so other than to note it and be glad for the fact, I have no idea how long those expectations will remain dormant.

Bottom line – we’re bumping along the bottom and hopefully we’ll see a meaningful turnaround sometime this fall. But right now, anyone saying things are going well and we’re fully into recovery doesn’t realize how fragile the economy is right now and certainly doesn’t know what they’re talking about.

~McQ