5 Key Takeaways from Yesterday’s Weak GDP Report

Some good summarizing thoughts here from Consumer Metrics Institute:

– As detailed above, the contraction was driven primarily by dramatic (but not unexpected) reversals to the one-quarter spikes in government spending and inventory growth, which sharply (and conveniently) improved the headline number just prior to the November election. At best both of those one-quarter binges simply brought zero-sum economic activity forward by a quarter, and at worse we will see both of these surges later treated as data anomalies that disappear in future revisions.

— For those of us who follow these numbers closely (and perhaps foolishly try to make some longer-term sense of them), the inexplicable economic surge reported for the third quarter has now at least reversed, and the general weakening pattern previously recorded for 2012 seems to have been confirmed.

— The consumer data was actually a modest bright spot. Per-capita disposable income increased substantially, as did personal consumption expenditures for both goods and services. Similarly commercial fixed investment expenditures improved.
But there are several longer term issues with the data:

— We have mentioned before that the BEA is notoriously poor at recording turning points in the economy in “real time.” The first quarter of 2008 was a classic example, initially being reported in “real time” as yet another quarter of sustained growth before being revised downward several times over some 40 months to become the first quarter of contraction leading into what we now call the “Great Recession.” We fully expect that ultimately the surprising economic upturn seen in the 3Q-2012 data will largely vanish in future revisions.

— And in truth it is hard to look at these new numbers without at least some cynical thoughts about the reported numbers for the prior quarter. We were frankly astonished when the final numbers for the third quarter came in at a 3.09% “full recovery” growth rate, driven largely by unexplained increases in Federal spending, particularly in the Department of Defense (DOD) — the timing of which was completely controlled by an Administration in serious need of positive pre-election economic headlines. The annualized rates of growth for defense spending rose to over 15% in 3Q-2012, only to magically reverse to a -15% annualized contraction rate in 4Q-2012 — after the polls had closed.

To that last point: arguably the DOD was simply moving materiel acquisitions forward in anticipation/avoidance of “fiscal cliff” sequesters, with the economic impact of the contracting binge a mere side effect of bureaucratic hoarding. We should all hope that the context of any such timing shenanigans were more budgetary than political in nature.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • inDC

    I think this GDP report was positive, simply because it was true. After the last six months of our government doing everything it could to manipulate numbers — massive seasonal adjustments to employment figures, forced spending by government agencies, large increases to disability rolls, etc — it is nice to know all their efforts failed. Yes, they did help re-elect the President. But going forward, perhaps we can start talking about real solutions and policies, because the economy is in real trouble. 2012 annualized GDP less than 2%? Yes, that is real trouble.

  • William Bedloe

    If they can manipulate numbers once they will do it again…foolish to think otherwise

  • TruthNotPropaganda

    I’ve argued before (and will again) that if one were to strip away the “growth” reported in quarterly/annual GDP that is derived from nominal prices paid (such that even lower real aggregate consumption can allow for the reporting of positive GDP figures), we’d often see significantly lower rates of GDP than what is being reported (and even quite a few more negative GDP reports).

    Some will argue that the statistical methodology and formulaic adjustments used to purportedly control for this work reasonably well, and neutralize any overstatement of GDP growth attributable to nominal prices/costs (i.e. that official GDP numbers do well in reporting the real quantity of the output of goods & services); paint me skeptical.

  • Lukey

    So when government spending isn’t “surging” the economy is declining. I get that when the private economy is suffering the effects of a balance sheet recession, this has some (current) beneficial effect. But, if it turns out that all this government spending is simply covering for the poor economic effect of the heavy hand of government (taxes, regulation, mal-investments) we may be at this for quite a while. The “cure” could end up being worse than the disease.

  • perpetual neophyte

    It may also be worth considering that the rise in private income figures could have been influenced by those people pulling forward bonuses, incomes, etc in hopes of avoiding a potential lack of any action on the reversion to pre-Bush tax brackets for everyone.

  • Anonymous

    Looks like you were spot on:

    “Most of the gain was due to what the U.S. Commerce Department called “a sharp acceleration in personal dividend income, an upturn in personal interest income, and an acceleration in wage and salary disbursements.” (I.e. pulling dividend and interest forward due to worries over tax increases)

    Add this to the GDP q/q deflator controversy, GDP was solidly negative.

  • Hagakure

    Let’s get real. Last month you say “there was no recession, I was right.”
    This month you say “there might be a recession after all.”. In a few months ” you
    say “we are in recession, I am surprised.”

    Forecasting is a fool’s business. Forecasters never quit forecasting
    because it pays well. Fortune telling lady in a back street makes
    a good living too.

  • El Viejo
  • SellSiderBS

    Cullen is free, like all other sell-side analysts, to revise his forecasts hourly.

  • SS

    Cullen didn’t write this post you two morons. Do you even read the posts or do you just leave hate comments for your own pleasure? Get lost.

  • http://www.nowandfutures.com bart

    He didn’t start off the post with “Some good summarizing thoughts from…”? That means he doesn’t agree with it?

    Get a dictionary.

  • http://www.orcamgroup.com Cullen Roche

    Just because I say a post is “good” or post it here doesn’t mean I stand by the views 100%. I try to provide many different perspectives here. Readers should NEVER assume that posts by someone else or quoted commentary by someone else is something I endorse entirely.

    Obviously, I don’t think we’re in a recession right now and I don’t think the risk of recession is as high as many presume. I’ve been painfully clear and consistent about this position over the years. No change in outlook. That should clarify any confusion here.