4 REASONS THE “GOOD” GDP IS WORSE THAN IT LOOKS
David Rosenberg isn’t fooled by the “better than expected” GDP data this morning. After taking a look under the hood, the number is actually much weaker than it looks:
The growth bulls are out in full force today in the aftermath of the headline 5.7% QoQ annualized print on fourth quarter GDP growth in the U.S. We offer a slightly different perspective.
First, the report was dominated by a huge inventory adjustment — not the onset of a new inventory cycle, but a transitory realignment of stocks to sales. Excluding the inventory contribution, GDP would have advanced at a much more tepid 2.2% QoQ annual rate, not really that much better than the soft 1.5% reading in the third quarter.
Second, it was a tad strange to have had inventories contribute half to the GDP tally, and at the same time see import growth cut in half last quarter. Normally, inventory adds are at least partly fuelled by purchases of foreign-made inputs. Not this time. Strip out inventories and the foreign trade sector, we see that domestic demand growth in the fourth quarter actually slowed to a paltry 1.7% annual rate from 2.3% in the third quarter. Some recovery. Based on some simulations we ran, demand growth with all the massive doses of fiscal and monetary stimulus should already be running in excess of a 10% annual rate. So, the real question that nobody seems to ask is why it is that underlying demand conditions are still so benign more than two years after the greatest stimulus of all time. The answer is that this epic credit collapse is a pervasive drain on spending and very likely has another five years to play out.
Third, if you believe the GDP data — remember, there are more revisions to come — then you de facto must be of the view that productivity growth is soaring at over a 6% annual rate. No doubt productivity is rising — just look at the never-ending slate of layoff announcements. But we came off a cycle with no technological advance and no capital deepening, so it is hard to believe that productivity at this time is growing at a pace that is four times the historical norm. Sorry, but we’re not buyers of that view. In the fourth quarter, aggregate private hours worked contracted at a 0.5% annual rate and what we can tell you is that such a decline in labour input has never before, scanning over 50 years of data, coincided with a GDP headline this good. Normally, GDP growth is 1.7% when hours worked is this weak, and that is exactly the trend that was depicted this week in the release of the Chicago Fed’s National Activity Index, which was widely ignored. On the flip side, when we have in the past seen GDP growth come in at or near a 5.7% annual rate, what is typical is that hours worked grows at a 3.7% rate. No matter how you slice it, the GDP number today represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker — a few grains won’t do.
Fourth, while the Chicago PMI and the revision to the University of Michigan consumer sentiment index also served up positive surprises, the “hard” data in terms of housing starts, home sales and consumer spending suggest that there is little, if any, momentum heading into early 2010. Moreover, the prospect that we see a discernible slowing in the pace of economic activity this quarter and a relapse in the second quarter is non trivial, in my view — by then, today’s flashy headline will be a distant memory.
Source: Gluskin Sheff
What? Are we to believe the GDP numbers are not truly reflective of a robust economy? I learned years ago to go with what looked and felt right, not what the government reported. That instinct has served me very well. Instincually, can we really believe that a 5.7% growth is realistic? Perhaps, but my instinct say, no way.
Can someone explain how to discern between the onset of a new inventory cycle and a transitory realignment of stocks to sales?
I found this:
Inventory adjustment:
“The inventory adjustment process differs over the business cycle: for a given level of excess inventories, firms disinvest more in recessions than they do in expansions. The inventory adjustment process has changed little between the 1980s and 1990s, suggesting that recent advances in inventory control have had little effect on adjustment costs. Nevertheless, the optimal inventory-sales ratio in the durable goods sector has declined significantly…”
And this:
Inventory cycle:
“Also termed stock cycle, an inventory cycle is the fluctuation of GDP caused by the accumulation and the selling of stocks/inventories. If production is greater than demand, GDP will rise but companies will also accumulate unsold stocks. This will encourage some to scale back production, cutting GDP even if demand remains constant. An economic cycle is created and normally the inventory cycle amplifies the existing economic cycle as stocks are accumulated in good times and production is reduced in bad times.
In the global recession of 2008, demand plunged, leaving companies with significant unsold inventory. They responded by mothballing factories leading to a plunge in industrial production, output and GDP. Once the stock was sold output rose again purely because some production lines were restarted.”
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What I get from the two meaning is that inventory adjustment is an ongoing process of aligning stock with sales. While the inventory cycle is designed to rebuild stock after they were depleted during the contraction.
Hope that helps
guess what happens when firms restock inventory? their suppliers can start hiring again! wsj had an article awhile ago about this with respect to catepillar, calling it the whipsaw effect. people start going back to work, they can start buying again, and the inventory will need to be replenished, and you go from a vicious cycle to the beginnings of a virtuous cycle…but i am just an investor, not an economist…
TO follow up: what I think Rosie is saying is that companies overshot to the downside and are now aligning their inventories with sales, not building inventories in anticipation of stronger sales.
No way on God’s earth did the GDP increase at 5.7% rate in any meaningful way. Simply looking at housing, consumer spending, and employment would tell anyone that a 5.7% increase in GDP is pure b.s.
with all those numbers coming out for the last two months, ajusted, seasoned, some system we got here, feels like we have an enron type of an economy, and those guys went to jail. how sad…
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