Consumer Metrics Insights

From Consumer Metrics:
November 22, 2011 - Third Quarter GDP Revised Downward: In their second estimate of the third quarter 2011 GDP, the Bureau of Economic Analysis (BEA) revised the headline growth number downward by over a half percent to an annualized growth rate of 2.01%. The real story within the data, however, was that compared to last month's "Advance" estimate the new report showed substantially weaker commercial fixed investments while the draw-down of inventory levels was more intense -- putting the new numbers for third quarter aggregate commercial GDP into net contraction. In general consumer contributions were slightly weaker, while a substantial downward revision in imports somewhat softened the bad news in the headline number. Meanwhile, the public's per-capita disposable income continued to shrink -- but at a newly revised and sharply greater rate. As usual, this revision to the prior month's report does not reflect actual changes in the economy, but rather a month's improvement in the BEA's understanding of what was happening in the prior quarter. As such it tells us as much about the BEA's "guesstimating" processes as it does about the economy. Among the notable items in the report: -- Aggregate consumer expenditures for goods was revised downward slightly to a +0.30% annualized growth (previously reported to be +0.35%). -- The annualized growth rate for consumer expenditures was also revised downward by 0.05%, and is now estimated to be at 1.33%. -- The growth rate of private fixed investments was lowered by 0.15%, with the new number coming in at 1.45%. -- The draw-down of inventories is now nearly a half percent worse than previously reported, pulling -1.55% from the headline annualized growth rate. Conventional wisdom is that this bodes well for the economy in the future, since production will presumably have to eventually ramp-up to replace that lost inventory. But in fact there are a number of wildly conflicting ways to spin this inventory number: -- Production has lagged demand, with factories struggling to keep up with increasing demand (unfortunately implausible given the anemic consumer growth numbers mentioned above); -- Factories are reducing inventories in anticipation of weakening demand (plausible); -- Inventory levels were ridiculously high to begin with (implying that much of the "recovery" was wishful thinking; again plausible); -- Factories have simply cut production costs by cutting production levels (thereby inflating bottom lines without the benefit of increasing commerce; highly plausible); -- Or our favorite: the BEA's deflaters have shot them in the foot again (with deflating commodity prices "shrinking" inventories even as physical inventories remain largely unchanged; also highly plausible). Of the five spin scenarios outlined above, the only positive one is also the least plausible. -- Total expenditures by governments at all levels is now reported to be very slightly contracting, continuing a string of four quarters of contraction. This number masks a duality in state and local spending levels, where "consumptive expenditures" (i.e., operating budgets) continue to shrink but are partially offset by increasing investments on infrastructure. -- Exports are now reported to be slightly higher relative to the previous estimate, raising the contribution that they made to the overall GDP growth rate to +0.58%. -- Imports dropped substantially compared to the previous "Advance" report, and are now removing only -0.09% from the growth rate of the overall economy (previously this number was -0.34%, a full quarter of a percent worse for the headline number). -- The annualized growth rate of "real final sales of domestic product" was revised up slightly to +3.56%. This was the result of the higher draw-down of inventories offsetting the generally weaker numbers shown elsewhere. -- Working backwards from the data tables, the effective "deflater" used by the BEA to offset the impact of inflation was 2.49%, essentially unchanged from the previous report. Again, unlike past quarters this number is generally in the same ball-park as similar data from the BEA's sister agencies -- which have more tightly tracked the impact of gasoline and grocery costs over the past year and a half. Substituting the line-item appropriate (CPI or PPI) current inflation rate published by the Bureau of Labor Statistics (BLS) causes the "real" GDP growing at a 2.46% annualized growth rate, somewhat higher than the official headline rate. -- Perhaps the most negative item among the revisions is in per-capita disposable income, which was revised sharply downward and is now reportedly shrinking at an annualized -2.1% rate during the third quarter (revised from a -1.7% in the previous "Advance" estimate). If you are looking for one line item that largely explains the mood of the general public, this is the one to monitor.
My view:

 The recovery is best described as implausible given all the headwinds consumers are facing.

 One critical observations that should give stock market investors pause is the line highlighted that factories may have cut production costs by cutting production levels and thereby inflating bottom lines.
 It is my hypothesis that the strong earnings showing on the S&P 500 and other stock markets is a temporary measure that will soon fade quickly and give us a more realistic view of valuations.

4th quarter reported earnings and 1st quarter earnings in 2012 should be quite insightful.

 Dividend dependent investors will probably not like the results.


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