Analysis
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The election is over. We have the same President, the same party in control of the House, the same party in control of the Senate. I have the same Congresswoman and U.S. Senator and the same party is in control of both houses in California. People must be really, really happy with politicians.
3rd Q 2012 GDP was out 2 weeks ago and this week I am providing all the analysis you need in the piece below by Rick Davis of Consumer Metrics of 1stQ2012 GDP. Rick offers, in my view, more perspective than all of the media economists put together.
Distilled to its essence the GDP report says that the economy sucks. Worse yet, this is with expanded money supply, ridiculously accommodative interest rates and massive deficit spending. Worse than worse is that fact that what is happening in the EU will hurt US GDP. If that is not enough, Rick's regular real time analysis of consumer spending shows a sharp drop in the 4th quarter. Some is due to the storm but, interestingly, Rick had noted a sharp drop in consumer spending before this and the previous Presidential election.
If the 3rdQ2012 was bad it appears
that 4thQ2012 will be worse.
IV) GDP
This entire section is by
Rick Davis of Consumer
Metrics.
In their first ("Advance") estimate
of the US GDP for the third quarter of 2012 the Bureau
of Economic Analysis (BEA) found that the economy was growing at a 2.02%
annualized rate, some 0.76% higher than for the prior quarter and at very
nearly the same level as reported for the first quarter of 2012.
Although the overall number was higher, the report included a serious mix
of signals. Among the components contributing to the improved third quarter
growth rate were sharply higher consumer goods consumption, significantly
higher governmental expenditures, a reduced rate of inventory contraction
and less imports. On the other hand consumers used fewer services, fixed investments
weakened and exports tumbled in the face of the global economic slowdown.
The BEA's bottom line of "real final sales of finished goods" had an annualized
growth rate of 2.14%, about 0.42% above the 1.72% growth rate for the prior
quarter.
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.
And real per capita disposable income was reported to be essentially flat
during the quarter (contracting at a -0.01% annualized rate). During the past
6 quarters (18 months) real per capita disposable income has grown (in total)
a mere $14 per year -- hardly enough to ignite a consumer-led recovery.
Among the notable items in the report:
-- The annualized growth rate of consumer expenditures for goods strengthened
markedly, contributing 1.03% to the headline number (up 0.95% from the essentially
flat reading for the prior quarter, but down slightly from the first quarter
of 2012).
-- The contribution made by consumer services dropped noticeably to 0.39%
-- off sharply from the 0.99% recorded during the previous quarter.
-- The growth rate contribution from private fixed investments dropped again
to 0.20% (down -0.36% from the prior quarter and about a full percent lower
than the first quarter).
-- Inventories continued to shrink, although the pace moderated. The contraction
of inventories removed -0.12% from the headline number, an improvement from
the -0.46% drag recorded in the prior quarter.
-- The most surprising change in the economy came from sharply increasing
governmental expenditures. Growth in government spending was reported to have
added 0.71% to the headline number, the first "positive" contribution in over
two years. All of that growth came from Federal spending, while the state
and local contribution to the headline remained essentially flat (-0.01%).
-- Shrinking exports pulled the headline number down by -0.23%, a remarkable
change from the 0.72% boost provided in the prior quarter. Clearly the weakening
global economy is starting to impact the US economy.
-- And shrinking imports actually added 0.04% to the growth rate. This also
is a reversal from the -0.49% drag during the prior quarter. Although reduced
imports help the headline number mathematically, they are ultimately a sign
of weakening domestic demand.
-- The annualized growth rate of "real final sales of domestic product" was
revised upward to 2.14%, some 0.42% above the prior quarter but still below
the 2.36% reported for the first quarter of 2012.
-- Real per-capita disposable income was down $1 during the quarter (to $32,778
per year -- up only $14 per year from the $32,764 reported for the 1st quarter
of 2011, now some 6 quarters ago).
The Numbers
As a quick reminder, the classic definition of the GDP can be summarized with the following equation:
GDP = private consumption + gross private investment + government spending + (exports - imports)
or, as it is commonly expressed in algebraic shorthand:
GDP = C + I + G + (X-M)
In the new report the values for that equation (total dollars, percentage of the total GDP, and contribution to the final percentage growth number) are as follows:
GDP Components Table
| Total GDP | = | C | + | I | + | G | + | (X-M) | |
|---|---|---|---|---|---|---|---|---|---|
| Annual $ (trillions) | $15.8 | = | $11.2 | + | $2.0 | + | $3.1 | + | $-0.5 |
| % of GDP | 100.0% | = | 70.8% | + | 13.0% | + | 19.6% | + | -3.4% |
| Contribution to GDP Growth % | 2.02% | = | 1.42% | + | 0.08% | + | 0.71% | + | -0.19% |
The quarter-to-quarter changes in the contributions that various components make to the overall GDP can be best understood from the table below, which breaks out the component contributions in more detail and over time. In the table we have split the "C" component into goods and services, split the "I" component into fixed investment and inventories, separated exports from imports, added a line for the BEA's "Real Finals Sales of Domestic Product" and listed the quarters in columns with the most current to the left:
Quarterly Changes in % Contributions to GDP
| 3Q-2012 | 2Q-2012 | 1Q-2012 | 4Q-2011 | 3Q-2011 | 2Q-2011 | 1Q-2011 | 4Q-2010 | 3Q-2010 | 2Q-2010 | 1Q-2010 | 4Q-2009 | 3Q-2009 | 2Q-2009 | 1Q-2009 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total GDP Growth | 2.02% | 1.26% | 1.97% | 4.10% | 1.28% | 2.48% | 0.08% | 2.39% | 2.60% | 2.24% | 2.33% | 4.03% | 1.46% | -0.32% | -5.25% |
| Consumer Goods | 1.03% | 0.08% | 1.11% | 1.29% | 0.33% | -0.22% | 1.27% | 1.78% | 0.86% | 0.76% | 1.18% | -0.10% | 1.68% | -0.46% | 0.06% |
| Consumer Services | 0.39% | 0.99% | 0.61% | 0.16% | 0.85% | 0.92% | 0.95% | 1.06% | 0.88% | 1.05% | 0.54% | 0.09% | -0.18% | -0.75% | -1.12% |
| Fixed Investment | 0.20% | 0.56% | 1.18% | 1.19% | 1.75% | 1.39% | -0.14% | 0.87% | -0.10% | 1.58% | -0.10% | -0.69% | -0.32% | -2.49% | -4.73% |
| Inventories | -0.12% | -0.46% | -0.39% | 2.53% | -1.07% | 0.01% | -0.54% | -1.61% | 1.97% | 0.07% | 2.23% | 4.55% | 0.19% | -1.03% | -2.29% |
| Government | 0.71% | -0.14% | -0.60% | -0.43% | -0.60% | -0.16% | -1.49% | -0.94% | -0.06% | 0.59% | -0.69% | 0.23% | 0.79% | 1.94% | 0.37% |
| Exports | -0.23% | 0.72% | 0.60% | 0.21% | 0.83% | 0.56% | 0.75% | 1.24% | 1.18% | 1.14% | 0.70% | 2.55% | 1.48% | 0.10% | -3.78% |
| Imports | 0.04% | -0.49% | -0.54% | -0.85% | -0.81% | -0.02% | -0.72% | -0.01% | -2.13% | -2.95% | -1.53% | -2.60% | -2.18% | 2.37% | 6.24% |
| Real Final Sales | 2.14% | 1.72% | 2.36% | 1.57% | 2.35% | 2.47% | 0.62% | 4.00% | 0.63% | 2.17% | 0.10% | -0.52% | 1.27% | 0.71% | -2.96% |
Summary
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 uptick 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.
V) Techs
The two short term Sto's, the 60 Minute and 100 Minute, engaged "refresher" downcycles as posited last week, the two recrossing to the upside on Monday, having filled the +.18 tic bearish gap also cited last week. Following that upcross, both a bearish gap and then a bullish gap were opened and quickly closed by the end of Tuesday's trade. Then, on Wednesday (following the Obama victory), a huge 1 point bearish gap was forged as the power of the Daily Sto's upcycle, now in its 11th day (avg.=15-20 days), engaged full force, taking the 10 year Treasury Note to the top of the range (price) of the congestion area initiated last August and defined by a yield range of 1.88%-1.63%. Where to from here? With the two short term Sto's richly overbought, resistance encountered at the top of the congestion area and a formidable bearish gap underlying, the likelihood of further declines in yield is slim in the very short term. However, given that the Daily Sto has the potential of continuing its upcycle well into next week, a "refresher" downcycle in the 60 and 100 Minute Sto's followed by a re-assay of the 1.63% metric and slightly beyond is possible. To reiterate last weeks commentary:
However, given that the Daily Sto is now in an upcycle which will hold sway for the next 15-20 days (think until Thanksgiving), the downward corrections of the short term Sto's will be of the "refresher" variety, allowing the 10 year yield to work lower on successive rebounds while the Daily Sto prevails in its upcycle.
With a view to the longer horizon, the likelihood that the Note has entered the early stages of a secular turn to a bear market is increasingly likely. Why? Because the Monthly Sto, which has been in a secular bull cycle since August 2011, is now long in the tooth with respective to duration (avg.=12-15 months).
The final fill of the most distant overhead bullish gap would mark the yield at 1.42% but that is increasingly looking like the triumph of hope over experience. With the Monthly Sto slowly turning from a secular bull market to a secular bear market, the underlying bearish gaps will become prepotent…powerful technical phenomena working to draw the Note's price lower (yield higher).
The Note closed on 11/08/12 at a 1.63% yield.
CAUTION: BE PREPARED FOR AN INCREASINGLY VOLATILE MARKET AS BULLISH AND BEARISH GAPS ARE OPENED AND CLOSED INTRADAY, ALMOST ON A DAILY BASIS!
(Click on the following link http://www.stomaster.com/stopdfdc.pdf to view the Daily, Weekly and Monthly Sto graphical presentation - 3rd, 4th and 5th from the top).
(See http://www.stomaster.com/stolet2.htm for a primer on bullish and bearish divergences)
(Peruse http://www.stomaster.com/stogaps.pdf
for a primer on gaps.)
For those motivated readers who are interested in delving further into the analyses and details of how the Stochastics, Divergences, Pattern Recognition and Bullish and Bearish Gaps all came together to contribute to StoMaster's phenomenal call last August 2011 of the currently realized yield (July 2012) on the 10 year Treasury Note, click on the following link: http://www.stomaster.com/stoperform.pdf
If you have something to add to this discussion please post a comment on the blog.
Dick Lepre
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
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