It never ceases to amazes me how investors, who are in the business of pricing reality, can completely ignore the obvious. This became especially true during the internet bubble, as anything with a dot com on the end suddenly became worth billions. Remember K-Tel? Dr. Koop? I think you get the picture.
The same phenomenon is taking place today. While economic statistics continue to demonstrate a rapidly deteriorating economy, investors are all too willing to ignore everything and extrapolate a very unrealistic view into the valuation of equities.
The second quarter Gross Domestic Product (GDP) figures are a perfect case in point. The headline number of 2.4% was already signficantly below estimates made just weeks earlier. And, if we examine the data more closely, it is apparent that the quarter was even weaker than the estimate would suggest.
Inventories have had a major impact on growth over the past few quarters, and the change was estimated to have added more than one percentage point to the 2.4% annual rate of GDP growth reported by the Commerce Department Friday. But factory-order data for June shows that the estimate used to calculate the preliminary number was way off.
The report noted a 1.7% drop in nondurable goods inventories in June following a 2.5% drop in May. The Commerce Department had assumed a 0.5% rise for last month.
According to Shadow Stats, GDP revisions back to first-quarter 2007 confirmed that the economic downturn was more severe than previously reported. Rising inventories and slowing growth have set the stage for renewed quarterly GDP contraction in third-quarter 2010.
The upside revision to first-quarter 2010 growth from 2.74% to 3.73% was also largely the result of inventory growth, which accounted for 71% of the first-quarter’s total gain. Revised real growth was 1.09% for first-quarter final sales, or GDP net of inventory changes. Inventory gains also accounted for 44% of the 2.39% total growth in the second-quarter, with real final sales growth of 1.34%.
Even price inflation quietly was much worse than expected. The GDP implicit price deflator showed an annualized pace of inflation in second-quarter 2010 of 1.83%, up from a revised 1.05% in the first-quarter.
In an unusual divergence, annualized inflation for the Consumer Price Index in the second-quarter was a contraction of 0.72% versus a positive 1.53% in the first-quarter. The higher the inflation rate used in deflating the GDP, the weaker the inflation-adjusted number and vice versa.
While most economic data is backwards looking and has little to no predictive value, it's clear that the "recovery" has been nothing but a phantom. And, with money supply figures contracting at unprecedented rates, the economy and stock market are destined to follow.
Marko's Take
Showing posts with label Gross Domestic Product. Show all posts
Showing posts with label Gross Domestic Product. Show all posts
Wednesday, August 4, 2010
Wednesday, July 28, 2010
Economic Recovery Anything But Durable
While investors are drinking the Obama Administration's Kool-Aid and popping champagne corks over the slew of optimistic earnings reports and guidance, the economy continues to quietly deteriorate. This morning we were treated to another disappointment: durable goods. Add to that the ongoing weakness in real estate and sub-par retail sales and it's hard to understand the unbridled optimism that has suddenly gripped the markets.
Not that economic statistics are a good barometer of future market prices. Like earnings, they are backward looking and generally have ZERO predictive value. Markets typically turn well before the economy and corporate earnings. So, what's my beef?
The main problem with these economic data is that they are occurring in the middle of a so called "recovery" and one that began more than a year ago. At this stage, we should be seeing growth in employment, sales, economic output and an increase in taking on credit. None of those are happening.
Durable Goods came in well below expectations. The always wrong consensus had them rising about a percent. They declined by a percent.
Housing starts peaked in the 2005-2006 period at above 2 million units. From there, they dropped to about 500,000 at the bottom of the financial meltdown of 2008-2009. Since then, they have merely bounced around the lows. No material recovery in more than a year. We have not experienced the current low levels in decades.
June real retail sales rose at a 3.7% year-to-year pace, down from May’s revised 4.8% and from the first quarter's growth rate of 6.6%.
According to ShadowStats, adjusted for inflation, retail sales in May and June fell at an annualized pace of 7.6%. Compared to the peak in 2008, retail sales are still down 10%. If that pattern continues into the current quarter, a contraction in real third-quarter 2010 GDP would be a good bet.
What makes the economic sluggishness so worrisome is that it comes after the orgy-like expenditures and bailouts from the Obama Administration and near-zero interest rates. The Federal Reserve is pretty much out of bullets. The Obama Administration is out of bullets. Can you imagine how difficult economic conditions might become now that all the stimulative measures have already filtered through?
On Friday, the first estimate of Gross Domestic Product will be reported. Consensus estimates are for a 3.5% advance. That number would seem way too optimistic and sets up the market for a major surprise.
Don't get me wrong. Rising corporate earnings are great. They prove that corporate America can make the necessary adjustments to cope with the very harsh economic conditions. A victory for capitalism. But, if we are about to enter the "second-dip", tomorrow's earnings will come under renewed pressure. So, using this one data point in the absence of context will prove quite misleading and cause investors to make poor decisions.
Marko's Take
Not that economic statistics are a good barometer of future market prices. Like earnings, they are backward looking and generally have ZERO predictive value. Markets typically turn well before the economy and corporate earnings. So, what's my beef?
The main problem with these economic data is that they are occurring in the middle of a so called "recovery" and one that began more than a year ago. At this stage, we should be seeing growth in employment, sales, economic output and an increase in taking on credit. None of those are happening.
Durable Goods came in well below expectations. The always wrong consensus had them rising about a percent. They declined by a percent.
Housing starts peaked in the 2005-2006 period at above 2 million units. From there, they dropped to about 500,000 at the bottom of the financial meltdown of 2008-2009. Since then, they have merely bounced around the lows. No material recovery in more than a year. We have not experienced the current low levels in decades.
June real retail sales rose at a 3.7% year-to-year pace, down from May’s revised 4.8% and from the first quarter's growth rate of 6.6%.
According to ShadowStats, adjusted for inflation, retail sales in May and June fell at an annualized pace of 7.6%. Compared to the peak in 2008, retail sales are still down 10%. If that pattern continues into the current quarter, a contraction in real third-quarter 2010 GDP would be a good bet.
What makes the economic sluggishness so worrisome is that it comes after the orgy-like expenditures and bailouts from the Obama Administration and near-zero interest rates. The Federal Reserve is pretty much out of bullets. The Obama Administration is out of bullets. Can you imagine how difficult economic conditions might become now that all the stimulative measures have already filtered through?
On Friday, the first estimate of Gross Domestic Product will be reported. Consensus estimates are for a 3.5% advance. That number would seem way too optimistic and sets up the market for a major surprise.
Don't get me wrong. Rising corporate earnings are great. They prove that corporate America can make the necessary adjustments to cope with the very harsh economic conditions. A victory for capitalism. But, if we are about to enter the "second-dip", tomorrow's earnings will come under renewed pressure. So, using this one data point in the absence of context will prove quite misleading and cause investors to make poor decisions.
Marko's Take
Saturday, May 1, 2010
First Quarter GDP Shows Recovery... But How Real Is It?
Yesterday, the preliminary estimate of 1st quarter Gross Domestic Product (GDP) was released, indicating an annualized growth rate of 3.2% - down from the 5.6% annualized rate for the 4th quarter of 2009. Within minutes, officials of the Obama Administration were all over the media declaring the recession over and trumpeting the efficacy of their various stimulus plans. Strangely, after blaming the weather for the lack of job growth in recent months, they failed to credit the weather for the excellent economic news.
As with any government economic report, the headline number is a facade to the real story underneath. Worry not. Marko's Take, along with our staff of experts, is here to dissect the report and reveal the truth as to what's really taking place.
Spending by consumers rose at a 3.6% rate, more than double the 4th quarter pace and faster than any quarter in the past three years. But half the quarter's growth came from firms rebuilding inventories.
Consumer spending, which accounts for about 70% of the demand in the economy, remains the key. Consumer confidence has improved quite a bit from the bottom of the financial crisis, but remains depressed. The University of Michigan's Consumer Sentiment Index, released Friday, dropped slightly to 72.2 in April from 73.6 in March — and was well below the pre-recession levels, which exceeded 90.
Friday's data showed reported inflation remains tame, even as the economy climbs out of recession. The Federal Reserve's preferred gauge, the price index for Personal Consumption Expenditures, or the PCE deflator, excluding food and energy, rose an annualized 0.6% in the 1st quarter, compared with the 4th quarter's 1.8%. The Labor Department's employment cost index, the broadest measure of wages and benefits, rose 0.6% in the first quarter from the fourth, and was 1.7% higher than a year earlier.
Long-time readers know that we are not only highly skeptical of any economic new emanating from Washington, but that we can see right through the BS. Fortunately, we have the brilliant Dr. Williams and his fantastic site ShadowStats (http://www.shadowstats.com/) to assist us in this endeavor.
According to ShadowStats, the Alternate-GDP estimate for first-quarter 2010 was an approximate annual CONTRACTION of 1.5%. This reflects the bottom-bouncing at low levels of activity seen for much of the last year in key underlying economic series, not an economic recovery.
More disturbing is the analysis performed by Dr. Williams on the Money Supply. With just more than two weeks of reporting on April money supply, weekly contractions in M2 (institutional money funds and large time deposits) suggest that the pace of decline in the broader M3 is accelerating, with the nominal year-to-year change reflecting a record annual decline of roughly 4.8% in April, versus a decline of roughly 3.7% in March, if weekly reporting showed no further changes for the balance April.
According to Dr. Williams, real year-to-year change appears likely to deteriorate from a 5.8% contraction in March to an unprecedented reading of a 7% annual decline. Contracting annual growth in broad money supply nearly always precedes decelerating economic activity.
The contraction is money supply aggregates also signals systemic difficulties in the banking system. A properly functioning U.S. banking system would be lending increasing amounts of money, not contributing to a slow downward spiral in consumer and business credit outstanding and a pending renewed decline in economic activity.
The best way to really gauge what's going on is to pay attention to what you see anecdotally. Are you having trouble keeping up? Are your friends and family struggling? Are you paying more for food and gas and critical goods? These are better indicators than what Washington reports. Ultimately, if the "good" news is helping you, that what "good" is it?
Marko's Take
The California Wildlife Center is having a 5K walk on Sunday, May 2nd in Malibu. I'll be there, with my fellow "whacko-tarians". For more information on this wonderful organization and cause, please click here http://www.californiawildlifecenter.org/.
As with any government economic report, the headline number is a facade to the real story underneath. Worry not. Marko's Take, along with our staff of experts, is here to dissect the report and reveal the truth as to what's really taking place.
Spending by consumers rose at a 3.6% rate, more than double the 4th quarter pace and faster than any quarter in the past three years. But half the quarter's growth came from firms rebuilding inventories.
Consumer spending, which accounts for about 70% of the demand in the economy, remains the key. Consumer confidence has improved quite a bit from the bottom of the financial crisis, but remains depressed. The University of Michigan's Consumer Sentiment Index, released Friday, dropped slightly to 72.2 in April from 73.6 in March — and was well below the pre-recession levels, which exceeded 90.
Friday's data showed reported inflation remains tame, even as the economy climbs out of recession. The Federal Reserve's preferred gauge, the price index for Personal Consumption Expenditures, or the PCE deflator, excluding food and energy, rose an annualized 0.6% in the 1st quarter, compared with the 4th quarter's 1.8%. The Labor Department's employment cost index, the broadest measure of wages and benefits, rose 0.6% in the first quarter from the fourth, and was 1.7% higher than a year earlier.
Long-time readers know that we are not only highly skeptical of any economic new emanating from Washington, but that we can see right through the BS. Fortunately, we have the brilliant Dr. Williams and his fantastic site ShadowStats (http://www.shadowstats.com/) to assist us in this endeavor.
According to ShadowStats, the Alternate-GDP estimate for first-quarter 2010 was an approximate annual CONTRACTION of 1.5%. This reflects the bottom-bouncing at low levels of activity seen for much of the last year in key underlying economic series, not an economic recovery.
More disturbing is the analysis performed by Dr. Williams on the Money Supply. With just more than two weeks of reporting on April money supply, weekly contractions in M2 (institutional money funds and large time deposits) suggest that the pace of decline in the broader M3 is accelerating, with the nominal year-to-year change reflecting a record annual decline of roughly 4.8% in April, versus a decline of roughly 3.7% in March, if weekly reporting showed no further changes for the balance April.
According to Dr. Williams, real year-to-year change appears likely to deteriorate from a 5.8% contraction in March to an unprecedented reading of a 7% annual decline. Contracting annual growth in broad money supply nearly always precedes decelerating economic activity.
The contraction is money supply aggregates also signals systemic difficulties in the banking system. A properly functioning U.S. banking system would be lending increasing amounts of money, not contributing to a slow downward spiral in consumer and business credit outstanding and a pending renewed decline in economic activity.
The best way to really gauge what's going on is to pay attention to what you see anecdotally. Are you having trouble keeping up? Are your friends and family struggling? Are you paying more for food and gas and critical goods? These are better indicators than what Washington reports. Ultimately, if the "good" news is helping you, that what "good" is it?
Marko's Take
The California Wildlife Center is having a 5K walk on Sunday, May 2nd in Malibu. I'll be there, with my fellow "whacko-tarians". For more information on this wonderful organization and cause, please click here http://www.californiawildlifecenter.org/.
Sunday, February 28, 2010
Fourth Quarter GDP A 'Healthy' 5.7%... Or Was It?
As is frequently the case in government provided numbers, the headline numbers mask a much different story than that which is revealed by closer examination. And, so is the case with the rather robust growth rate in the fourth quarter Gross Domestic Product (GDP).
Strained budgets in states and local governments don’t just affect the area residents — they can cause a drag on the whole U.S. economy.
Spending from state and local governments fell at a 2% annual rate in the fourth quarter, a revised (GDP) report showed today. That’s much worse than the 0.3% drop in the original estimate, or the 0.6% decline in the third quarter. And, upcoming quarters could show similarly bad numbers as revenues continue to fall.
According to ShadowStats (http://www.shadowstats.com/), the FED continues to act like a serious problem exists in the economy. One example is the ongoing explosion in the money supply.
The St. Louis Fed’s Adjusted Monetary Base, seasonally-adjusted surged by $90 billion (an annualized 198% pace of increase) in the two weeks ended February 24th, to a record $2.184 trillion. The prior record high had been in the previous two-week period.
The monetary base — currency in circulation plus bank reserves — is the Fed’s primary tool for adjusting broad systemic liquidity, as measured by the money supply.
However, ShadowStats own monetary estimate of M3, the broadest form of monetary aggregate, is still on track for a deepening contraction.
As a result, according to ShadowStats, economic reporting increasingly will surprise the markets to the downside. Recent data in weaker home sales, new jobless claims and consumer confidence have not been of substance, but negative market reactions to those numbers likely foreshadow significant negative market reaction as the general outlook shifts, from one of ongoing economic growth and recovery, to one of renewed recession. Marko's Take agrees.
Nearly 6% growth is considered an outright economic boom, but few believe the current economy is booming, despite the revised report of official 5.9% annualized growth in the fourth-quarter GDP. As discussed later, most of the reported growth was due to relatively stronger non-farm inventories, yet the inventory improvement is not supported by strong orders.
When consumption fails to support production and inventories build-up, manufacturers tend to cut back production and GDP falls. This sets up renewed quarterly contractions beginning as early as the current quarter. Such would be viewed popularly as a double-dip recession.
So while the talking heads tout the so-called recovery, readers of Marko's Take know that this way of thinking will be quite short-lived. How can there be a real recovery until the unemployment rolls start coming down?
Think we're in a recovery? TAKE ME ON!
Marko's Take
Episode 3 of our YouTube series is now posted here (http://www.youtube.com/markostaketv). Please pay us a visit as more episodes, based on early blogs, will be added weekly, care of the Phoenix Film Group (http://www.phoenixfilmgroup.com).
Strained budgets in states and local governments don’t just affect the area residents — they can cause a drag on the whole U.S. economy.
Spending from state and local governments fell at a 2% annual rate in the fourth quarter, a revised (GDP) report showed today. That’s much worse than the 0.3% drop in the original estimate, or the 0.6% decline in the third quarter. And, upcoming quarters could show similarly bad numbers as revenues continue to fall.
According to ShadowStats (http://www.shadowstats.com/), the FED continues to act like a serious problem exists in the economy. One example is the ongoing explosion in the money supply.
The St. Louis Fed’s Adjusted Monetary Base, seasonally-adjusted surged by $90 billion (an annualized 198% pace of increase) in the two weeks ended February 24th, to a record $2.184 trillion. The prior record high had been in the previous two-week period.
The monetary base — currency in circulation plus bank reserves — is the Fed’s primary tool for adjusting broad systemic liquidity, as measured by the money supply.
However, ShadowStats own monetary estimate of M3, the broadest form of monetary aggregate, is still on track for a deepening contraction.
As a result, according to ShadowStats, economic reporting increasingly will surprise the markets to the downside. Recent data in weaker home sales, new jobless claims and consumer confidence have not been of substance, but negative market reactions to those numbers likely foreshadow significant negative market reaction as the general outlook shifts, from one of ongoing economic growth and recovery, to one of renewed recession. Marko's Take agrees.
Nearly 6% growth is considered an outright economic boom, but few believe the current economy is booming, despite the revised report of official 5.9% annualized growth in the fourth-quarter GDP. As discussed later, most of the reported growth was due to relatively stronger non-farm inventories, yet the inventory improvement is not supported by strong orders.
When consumption fails to support production and inventories build-up, manufacturers tend to cut back production and GDP falls. This sets up renewed quarterly contractions beginning as early as the current quarter. Such would be viewed popularly as a double-dip recession.
So while the talking heads tout the so-called recovery, readers of Marko's Take know that this way of thinking will be quite short-lived. How can there be a real recovery until the unemployment rolls start coming down?
Think we're in a recovery? TAKE ME ON!
Marko's Take
Episode 3 of our YouTube series is now posted here (http://www.youtube.com/markostaketv). Please pay us a visit as more episodes, based on early blogs, will be added weekly, care of the Phoenix Film Group (http://www.phoenixfilmgroup.com).
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