Thursday, October 29, 2009

Karl Denninger, "GDP Is... Better Than Expected?"

"GDP Is... Better Than Expected?"
by Karl Denninger

"Oh what a tangled web we weave...

Real gross domestic product - the output of goods and services produced by labor and property located in the United States - increased at an annual rate of 3.5 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent.

Looks good, right? Hmmmm... or is it?
• Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change.
• Real federal government consumption expenditures and gross investment increased 7.9 percent in the third quarter, compared with an increase of 11.4 percent in the second.

Ok, from this we can compute a few things: 3.5 - 1.66 - (7.9 * 30%) = -0.53%

Now let's adjust for inventories:
• The change in real private inventories added 0.94 percentage point to the third-quarter change in real GDP after subtracting 1.42 percentage points from the second-quarter change: -0.53% - 0.94% = -1.47%.

Ok, that's bad but not catastrophic and is an actual improvement compared to the second quarter. But....

• Current-dollar personal income decreased $15.5 billion (0.5 percent) in the third quarter, in contrast to an increase of $19.1 billion (0.6 percent) in the second.

• Personal current taxes increased $4.8 billion in the third quarter, in contrast to a decrease of $119.1 billion in the second.

Eeeeehhh... those are both going the wrong way. Taxes up, income down. And...

• Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second. Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent.

That's worse. A lot worse. Disposable personal income decreased in nominal terms q/o/q by 5.9% while in real terms (inflation adjusted) it decreased q/o/q by 7.4%! That is an enormous swing in purchasing power and not in the right direction!

• Personal outlays increased $148.2 billion (5.8 percent) in the third quarter, compared with an increase of $8.2 billion (0.3 percent) in the second. Personal saving - disposable personal income less personal outlays - was $364.6 billion in the third quarter, compared with $533.1 billion in the second.

• The personal saving rate - saving as a percentage of disposable personal income - was 3.3 percent in the third quarter, compared with 4.9 percent in the second.

So into decreasing personal income and disposable personal income people tried to spend anyway. Best guess: most of this was "cash for clunkers", which is the worst sort of "spending" - it is the taking on of more debt by replacing a paid-off car with one that now comes with a shiny (and nasty) payment book. The Trade: Go long auto repo outfits (aside: as far as I know there are no publicly-traded repo companies.)

Nothing in here I like; to the contrary, this report sucks and on a drill-down appears to be full of outright lies. Looking inside the data, the "big change" in private domestic investment is all residential fixed - up 23.4%. I don't believe it. I've been scouring the homebuilder earnings releases and data, and I don't see the numbers that support this. An improvement over the ditch-diving of the last many quarters, yes - but a 23.4% increase, a swing of fifty percent from Q2-Q3? Oh hell no. Where is it? It's not in Home Depot's or Lowe's quarterly results, it's not in the homebuilders, and I can't find it in the suppliers (lumber companies, etc) either. This sort of move would result in monstrous top-line revenue increases reported by firms in this sector and that simply has not happened.

Nor do the export and import numbers look right. Port of Long Beach and LA anyone? Those numbers also don't add up - swings of 20-25% in one quarter? Not reflected in container volumes and freight loadings. Yet it has to be - how do you get something in or out of here without it going through a port?

Government looks right, both federal and state/local. The "Obama will cut defense and war spending" folks have to be bashing themselves with a hammer - there's no evidence for that in the data, now three quarters into his administration. If you're anti-war and "bring the troops home", you may want to re-think whether voting for Barry was a wise decision - he sure as hell hasn't kept that promise. (Note that I didn't think he would either but that lie sure played well in San Francisco, didn't it?)

Forward the big problem is the deterioration in personal income. You can't spend what you don't have without credit creation, and that's fallen off a cliff. The Fed's credit reports continue to come in with huge contractions - this should not surprise, as demanding that banks lend to people who are seeing their income shrink is into the realm of pure idiocy.

The market likes the numbers although a lot of the move - perhaps all of it - is Bucky getting thrown under the bus once again. You can't expect the cheerleaders on CNBC to read beyond the headline numbers, and they (once again) did not disappoint in this regard. The first 20 minutes of "analysis" brought not one mention of the decease in personal income or disposable personal income, yet on a forward basis this is in fact the most important piece of information in the report. You cannot have an economic recovery when on a q/o/q basis real disposable income is contracting at a 7.4% annual rate and worse, the spread between nominal and real income is widening, indicating that mandatory purchases such a food, energy and health care - are increasing."
- Kark Denninger,

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