The Worst Numbers Since 2009 Lurk Under The Economy's Hood

Poking around under the hood of the economy, courtesy of our friends at Consumer Metrics Institute, we learned recently that our health has taken a turn for the worse.

While monthly data show a downtrend, daily figures show something more concerning - A sharp drop off in demand for goods and services over the past three weeks. 

Monthly demand

Daily demand

BEA Estimates 3rd Quarter 2013 GDP Growth at 2.84% Annual Rate

For the markets this is a "Goldilocks" report: not so weak as to elicit real concern, and not so strong as to suggest the Federal Reserve re-thinking its QE stance. It is also better than expected. But superficial focus on the modest improvement in the headline number completely misses some worrisome deterioration in key fundamentals:

-- Contributions to the headline number from aggregate consumer spending, fixed investments and exports all weakened -- enough to remove about a full percent from the growth rate.

-- The "contributions" from growing inventories and weakening domestic demand for imported goods added 1.22% to the headline number. Growing inventories and weakening demand for imported goods do not augur well for long term economic growth.

-- Real per capita disposable income is still increasing at an abysmal 0.4% annualized rate. If households continue to try to normalize their savings rates over the next few quarters (back towards the levels seen prior to the January FICA increase), those increased savings will have to come from tightened spending.

It has long been our view that the economy is not doing nearly as well as official government statistics imply.

While we know this from anecdotal evidence, it appears that statistical evidence is beginning to accumulate to confirm our suspicions - you can not spend your way out of debt - this is simply a logical fallacy.

How long this process will take to appear on the radar screens of big media is anyone's guess. Probably it will remain uncovered until sometime in January once the Christmas retail number trickle out.

For the time being, I am watching the Euro/Yen currency pair closely for some indication of a "risk off" trade.  This indicator gave us a nice early warning in 2007, long before the infamous events surrounding Bear Stearns and Lehman Brothers in 2008.
So far it still says "risk on", but is near an important resistance area.