BIG UPSIDE SURPRISE IN TOMORROW’S GDP REPORT?
We get initial estimates for Q4 GDP tomorrow and analysts expect a 3.5% print. That sounds nice, but given recent economic data it might be on the low end. Joe Lavorgna of Deutsche Bank is right in-line with estimates, but provides some color (via Business Insider):
“We expect today’s Q4 real GDP release to show a 3.5% annualized gain, although the underbelly of the report will likely be even stronger with final sales poised to grow at the fastest pace in nearly five years. No doubt, a mix shift away from inventory investment and toward final demand will give the economic expansion added sustenance. This positive momentum will be reinforced by extremely accommodative fiscal and monetary policy, which in turn causes us to question whether our forecast for 2011 real GDP is too conservative. Before the onset of the last recession, the dollar value of real GDP peaked at $13.364 trillion in Q4 2007. Based on our forecast of a 3.5% annualized gain in Q4 real GDP, the economy will surpass that level and rise to $13.394 trillion. This will officially place the economy in expansion mode. Much of the increase in output is coming through greater consumption and business investment. We estimate real consumer spending grew 4.5% last quarter, led by a massive 23% increase in durable goods expenditures—predominantly coming from auto sales.
Spending on nondurable goods is expected to be up 4.0%, while spending on services should continue to lag, rising just 1.9% in the quarter. While a 4.5% gain in consumption would be the largest since Q1 2006 (+4.5%), we do not believe our forecast is aggressive since the level of real November consumer spending is already up 4.4% at an annualized rate relative to Q3. Another area of strength will likely be equipment and software spending, also known as capex. We are anticipating a record fifth consecutive double-digit gain in capex (+10.0%). A slowdown is highly unlikely given current tax policy.
The accelerated depreciation allowances for capex could add a couple of tenths to real GDP growth this year and next. Companies now have the ability to expense 100% of their capital expenditure this year and 50% next year. This is likely to pull some spending forward into this year and next, thereby lifting capex even more than what we anticipated before the passage of the fiscal stimulus bill. We could see a noticeable payback in capex in 2013, but it is too early in the cycle to fret slowing growth—particularly since consumer spending has yet to accelerate. Given solid gains in consumer and business spending, we estimate that final sales, measured as GDP less inventories, will rise a solid 5.3%. This would be the largest gain since Q1 2006 (5.9%) and would represent the third largest increase in final sales in the last 10 years. To be sure, it is a noticeable improvement from a 0.9% gain in Q3 2010 and an average increase of just 1.1% since the recession ended. Assuming productivity growth slows, which is a critical assumption of ours, then by definition accelerating domestic demand must be met through faster job creation. The risks are certainly tilting toward faster real GDP growth this year than we presently forecast, but we will need to see at least one outsized employment report before we consider altering our projections. This probably did not occur in January, since weather appears to be distorting much of the data.”
JP Morgan is a bit more sanguine:
“Real GDP is expected to have grown at an annualized rate of 2.9% in the fourth quarter of 2010. Although the headline reading would only be slightly higher than that reported for 3Q (2.6%), we expect the composition of the report to be more favorable, highlighted by the strongest growth in consumption in four years. Our forecast calls for the level of real GDP to finally eclipse the pre-crisis level reported for 2Q08 (the 3Q10 level was less than 1% below the pre-crisis level).
We forecast a 4.0% saar increase in real consumption in 4Q, which should lead final sales up 5.4% saar. The data on retail sales and auto sales looked strong in the fourth quarter, although much of this strength was concentrated early in the quarter. In the prior five quarters of the recovery, consumption has been very restrained, averaging only 1.9% saar growth, so the expected acceleration in spending would represent a welcome change.
We expect inventories to be a significant drag on the economy in 4Q after inventories increased a very strong annualized rate of $121.4 billion in the third quarter. We expect a much more modest pace of growth in 4Q ($41.2 billion) based on the inventory data available so far for the quarter, and this slowing should subtract 2.5%-pts from real GDP growth. The trade data available through November indicate that the trade balance narrowed markedly in 4Q—we forecast a narrowing of the trade balance from -$505.0 billion in 3Q to -$441.7 billion in 4Q. This should add 2.1%-pts to GDP growth—the first contribution from trade in one year.
The data on new housing activity have remained stuck at depressed levels since bottoming after the end of the homebuyer tax credit. We look for only a slight 3.0% saar move up in residential investment in 4Q after this component plunged 27.3% saar in 3Q following the tax credit’s expiration.
The price data available for the fourth quarter show that food and energy prices have picked up a bit, but core prices remain soft. We forecast 1.8% saar growth in the PCE price index for the quarter and a much softer 0.4% saar change in the core measure. We expect the GDP chain price index for 4Q to increase 1.1% saar.”
I think the analysts are low balling the estimates. Recent ISM Manufacturing reports are consistent with GDP in the ~4% range. I think that’s a fairly reasonable estimate and that we could see an even better figure in final sales. Recent PCE data and slight improvement in exports also confirm this. “Better than expected” has been the theme of the last 6 months and there’s nothing in the data that makes me think this report will be any different.
So what accounts for the strong resurgence in domestic economic growth. The data was pointing towards a potentital double dip coming into the third quarter and now we get the strongest personal consumption number of the recovery? The personal income numbers don’t make alot of sense given there has been very little increase in employment. If you look at medicare tax receipts, incomes are still down year/year and falling. Where is all the income for these blowout consumption numbers coming from?
Don’t be fooled into thinking that the GDP numbers are all PCE. They are not. We’re likely to see PCE come in at 2.5% YoY. That’s good, but it’s not great. A combination of high deficits, easy comps and a consumer that appears to have slowed de-leveraging is doing enough to generate some decent economic growth.
Of course, the problem is that we need to de-leverage more so there is some chance that what we’re seeing is a return to the mess that created this to begin with….That’s short-term good and long-term bad.
“Where is all the income for these blowout consumption numbers coming from?”
There are lots of people living for free for months in homes that are “foreclosure in process”, so they’ve got lots of extra cash to buy those iGadgets.
“strongest personal consumption number “?
Ask Amazon.
I don’t buy this at all. The GDP is totally irrelevant because of the excessive spending by the GOOBERMINT. GDP is another “massaged” number just like the fake jobs numbers. Everybody keeps saying that we have 9.X% UE, when it is really somewhere north of 17-19%. If nobody has jobs who the hell is buying anything? The GDP numbers when corrected for the devaluation in our dollars is actually NEGATIVE.
Relying on GDP is not warranted in this setting considering the Debt ratios and all the toxic crap off the balance sheets. Go back to Mark to market and lets get a full accounting of who’s is really “making profit” and who is just cooking the books.
On this very site, there was the story about how banks just charged off their reserves and called it profit, which it is but only on paper. And if they really showed the real toxic crap on their books and did “real accounting” NONE of these corps would be making any money and they would be closed.
This is simply BS and fraud accounting. To put your trust and invest in this crap is insane.
Banks do not want mark-to-market rules back, they treat defaulted mortgages as performing and book those non-existing payments as a cash flow.
All makes sense, but I will tell you why the market will not return to sounder footing again until it totally crashes or there is a revolution or something:
1. The bonuses and salaries of the top 20% are rising rapidly and their spending has an effect that overcomes the weak spending of the lower 80%
2. Banks have paper profits, but they have always been in the business of paper profits anyway, as they can create money out of thin air via FRL, which is also a fraud, so nothing new about the suspension of marking to market
3. Wall St has captured the government FULLY
4. A lot of the SPX companies’ profits come from overseas, where growth and a weak USD are very supportive
5. This is a self-fulfilling bubble and nobody knows when it bursts, but probably as Jeremy Grantham thinks at around 1600 or end of this year.
InvestorX
“NUE missed earnings and RCL, RTN, PG, MUR, CY, MO, MJN, JBLU, BMY, DHI, CNX, CL, AUO, OI, DRE, ETFC and AMLN all missed either earnings or revenue targets since yesterday’s close but don’t let it bother you as long as the dollar keeps going down – that makes everything we buy more “valuable” – even poorly performing stocks! Isn’t investing simple?”
From:
http://www.philstockworld.com/2011/01/27/inflationary-thursday-dow-15000-5-will-get-you-a-happy-meal/
More companies MISSED EARNING than made, and of those ALL REVENUES ARE DOWN.
Actually, beats are coming in at about 60% and revenue beats are much higher.
Perhaps I’m wrong, but I’ve noticed large companies doing better than small (which makes sense, given global exposure of large caps), with financials particularly mixed. I’d say it’s a mixed bag, slightly more good than bad, with the big boys doing better than the small.
Joe Lavorgna and US GDP numbers in the same post. I threw up in my mouth twice.
http://leedsonfinance.com/wp-content/uploads/2011/01/1.jpg
GDP has been expected to come in at 4% by most people reporting for the last three weeks. That is not impressive anyway because without the ~10% or more excess spending by the government in 2010 the GDP woud be a -6% for the year. We have lost 8.3 M jobs, and in the last 2 years we have added ~2 M more high school graduates ( or not) to the workforce. This administration has done nothing but print/spend money and attack and destroy businesses. Socialists really don’t have a clue as to where jobs are created, and how an economy is grown.
This is an interesting chart. I always felt that as US becomes a service economy, it would track less to the ISM number. Thoughts?
So if the govt deficit spends to tune of 1.4T we can create GDP of 3.5%
If it deficit spent to tune of 3T we could get 6%.
Big deal. That’s not recovery. Its government spending out the wazoo.
Hate to break it to you, but during a balance sheet recession it’s the only thing that will keep the economy from imploding.
Hate to break it to you, but maybe we don’t need to “keep the economy from imploding”. Maybe, just maybe, there’s a reason the economy needs to implode and start all over again, wiping the slate clean on this gigantic mess we have all created over the last few decades. Malinvestment needs to be wiped out so that we can return to a truly productive capitalist system. Delaying the inevitable is as foolish as man’s belief that he can control nature. That’s why every once in a while we get those black swans in nature and financial systems, just to show us humans the follies of our arrogance and shatter our illusions of control.
If that leads to the collapse of the financial system, then so be it. That would only mean that it is still structurally unsound and would collapse on us anyway (maybe a few more years down the road) with even greater consequences.