Summary
The headline number of 2.97% is certainly decent, and in
the same historical "ball-park" context of pre-recession 4Q-2006 (2.75%),
some five years ago. The components of the current number, however, are
significantly skewed relative to the historic reference:
-- In
4Q-2006 both consumer goods and consumer services were growing at roughly
comparable rates (which we might normally expect, should the growth be fueled by
fatter wallets), and between them they contributed enough growth to nearly
account for the entire headline number. That was certainly not true five years
later.
-- In 4Q-2006 "real" per capita disposable income was growing at a
4.28% annualized rate. That number dropped to a miserable 0.96% rate in 4Q-2011
-- after actually going negative (i.e, contracting) in both the second and third
quarters of 2011.
-- The current dichotomy between consumer goods and
services is likely telling us something about relatively inelastic demand for
certain consumer goods (e.g., energy and food) even in the face of rising
prices. If per-capita disposable income is tightly constrained any impact of
rising food and energy prices will show up as decreased demand or softer prices
(or both) in consumer services. This would cause the relative growth rates for
goods and services to decouple in much the manner we are now
observing.
-- In 2006 both exports and imports were adding positive
contributions to the headline number, with exports alone contributing the
equivalent of two-thirds of the headline. By the same quarter in 2011 the
combined contributions from exports and imports had dropped from a positive
1.94% contribution to a -0.26% drag on the headline number.
-- In 2006
Governments at all levels were contributing a modest 0.22% to the headline
number. That number grew (under stimulus) to +1.21% in the second quarter of
2009. But by 4Q-2011 sharply contracting governments were sucking -0.84% from
that headline number -- a trend that is not likely to reverse anytime
soon.
-- During 4Q-2006 "real final sales" was growing at a robust 3.82%.
Five years later that number was a relatively weak 1.16%.
In our previous
reports we had expressed misgivings about the headline number masking general
weakness within the detailed line items. Since this revision does not materially
revise anything, our misgivings are still in place. This headline number
continues to consist mainly of a substantial inventory growth that (if real) is
unsustainable and will necessarily reverse in the coming quarters. On the other
hand, a significant portion of the apparent inventory growth may be an artifact
of progressively larger seasonal adjustments to inventory "deflaters" -- drawing
the accuracy of the headline number itself into question.
We continue to
believe that despite rosy headline numbers, the underlying dichotomies in the
data indicate an economy in dynamic flux -- with consumers less involved in the
recovery than is generally accepted, governments continuing to produce major
headwinds, and with trade likely to become a major drag going into 2012. We
further believe that the quality of these numbers (particularly the inventory
data and the "deflaters" used) is such that we should eventually expect
substantial revisions (most likely downward) to the published growth rates --
but probably not before the post-election quiet of July 2013.
Yet the
true consequence of overly optimistic headlines at this time (which,
incidentally, are much to the relief of the BEA's political masters) is that a
3% growth rate at face value simply cannot justify any further easing by the
Federal Reserve -- at least as the purported rationale for such easing. In fact,
one might argue that headline numbers similar to 4Q-2006 suggest that monetary
policies should be tightened to avoid a 2005-2007 style bubble. If some form of
QE is actually offered by Mr. Bernanke in the near future, it can only be
because he simply does not believe the BEA's optimism. When the numbers from the
BEA and the actions of the Fed move in opposite directions, who (or what) are we
to trust?
My view:
Take a long hard look at the chart at the top of the page showing the trendline of absolute demand over the past 60 days.
My question is this: Where is the recovery after trillions of dollars in stimulus spending and 3 rounds of Quantitative Easing?
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