Our friends at Consumer Metrics have just released some new data regarding the latest GDP growth numbers.
The following two excerpts explain the problem quite concisely:
The new data show a picture of an economy that is growing at a modest rate but with serious underlying issues -- including the weakening of fixed investments, a continued reduction of inventories and contracting exports. Once again this report paints the picture of an economy that is growing at a pace that is substantially slower than we should expect well over three years into a recovery.
For this set of revisions the BEA assumed annualized net aggregate inflation of 2.89%. In contrast, during the third quarter the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) recorded a substantially higher 4.98% annualized inflation rate. As a reminder: an understatement of assumed inflation improves the reported headline number -- and in this case the BEA's low "deflater" (more than 2% below the CPI-U) significantly boosted the published headline rate. If the CPI-U had been used to convert the "nominal" GDP numbers into "real" numbers, the reported headline would have shown an economy contracting at a -0.02% rate.
To our eyes this report is sort of like a "Goldilocks" moment. The report is arguably neutral, with a headline that can be spun as either "improving growth" or "continued weakness" depending on your particular agenda.
And the report is also a mixed bag when looking at the details: the headline was boosted by a burst of Federal spending and an extremely favorable set of deflaters -- while fixed investments weakened and exports collapsed. Even the consumer numbers were mixed, with the up-tick in goods spending at least partially offset by weakening growth in the consumption of services.
There were also surprises in the new numbers that probably merit caution moving forward:
-- Over 30% of the headline growth rate came from a $27 billion surge in Federal defense spending, possibly an artifact of fiscal year budgetary manipulations and advance contracting in anticipation of the "fiscal cliff."
-- The sharp contraction in exported goods is not a good sign for the economy. This was the largest contraction in exports since the first quarter of 2009, and it is certainly a sign that the US economy is not immune to contagion from overseas.
-- The contraction of per-capita disposable income simply means that households continue to be under pressure. As we have argued before the growth of consumer spending is not coming from fatter paychecks -- it is coming instead from other sources, including refinancing, strategic defaults and student loans.
Frankly, we had expected the report to show an improving economy -- although in this report the improvement is modest enough to be politically correct. Ultimately we find the headline 2.02% masking a somewhat weaker underlying reality.
When one does some simple calculations given the latest GDP numbers, it is easy to see that the 2% officially published GDP growth rate is far from the truth.
If we take GDP numbers at face value, and that is quite a stretch, we need to subtract 30% of the growth (or about 0.7%) to come close to the number of actual productive growth in the economy.
That number then is 1.3%!
If we consider the manipulation of the BEA's GDP deflator and use something closer to the published inflation rate, we drop to zero percent growth. Subtract defense spending that is likely to be forcibly reduced soon, and we are at Negative 0.7%!
So the economy is actually shrinking despite Trillions of dollars in stimulus and bailouts to banks and large corporations.
With the real economy shrinking, it is my view that the Federal government propaganda machine will soon be unable to cover up the truth.
Once the market realizes this, I expect to see stocks punished, and bonds and gold rise significantly.