Retail Sales, PPI - and Why the GDP Could Still Tank

US retail sales and producer prices were basically in line with expectations but that does not undermine the fact that the data was very weak and confirms that the Federal Reserve will be cutting interest rates by 75bp next week. USD/JPY hit a 13 year low last night after news that the automaker bailout plan is not going happen before the new year. Everyone had hoped that the automaker saga would come to an end, but lawmakers are not letting that happen. On Wednesday, I said that USD/JPY could hit to a new 13 year. At that time, the currency pair was trading at 92.50-93.00. The possibility of the US taking interest rates below Japanese levels should keep the US dollar soft going into the Fed interest rate decision on Tuesday.

Consumer spending fell for the fifth month in a row while producer prices dropped for the second straight month. The two biggest inputs into GDP are retail sales and trade. Consumers cut back spending more aggressively in October and November, which suggests that GDP growth could take a big dive in the fourth quarter, especially with the widening of the trade deficit.

GDP Could Contract by 4 to 6% in Q4

GDP could decline as much as 4 to 6 percent in Q4, which would be the largest contraction in growth since the 1980s. In the first quarter of 1982, GDP fell -6.4 percent. A 4 to 6 percent drop in GDP would not be out of the ordinary given the current conditions in the US economy. In the fourth quarter of 1990, GDP contracted by 3 percent and in the first quarter of 1991, it contracted by 2 percent. The current recession is worse than the one the US economy experienced in the 1990s, so a contraction in growth exceeding 3 percent would actually be expected.

The biggest drop in consumer spending came from gasoline station receipts. Prices at the pump have fallen more than 50 percent since the summer and gas stations are suffering as a result. The only silver lining in the retail sales report is the fact that not every sector saw slower sales. Electronics and sporting goods were in demand but this rebound after at least 4 consecutive months of softer spending is probably related to Black Friday sales.

By the way: EUR/GBP is at the brink of hitting 90 cents - a move that I called on Dec 8

Comments

[bosun.j:]

Yeoman like job as usual.

What do you see on:

USD-THB
GBP-THB
EUR-THB

Thanks!

2008 Dec 12 03:45 PM

[cyclingscholar:]

Just as high gasoline prices deceptively pushed consumer spending figures HIGHER, making the economy look artificially strong last summer; so ditto lower gas prices are making consumer spending look artificially WEAK. Only America's recessionista news media can manage to make HIGH gas prices AND low gas prices bad for consumers.....

cyclingscholar

2008 Dec 12 04:16 PM

[Philly Jim:]

bosun.j: Asian currencies are suppose to stay strong against Western currencies, this is part of the transfer of wealth from West to East. Multinationals can't wait to see Chinese have American purchasing power. Baht is surprisingly strong despite political chaos, crumbling exports and tourism and a spiritual leader (the King) about to depart.

Nice article Kathy! Good currency calls!

2008 Dec 12 04:18 PM

[Robert Nabloid:]

How low can rates go? Over a year ago I called the fact that lowering interest rates wouldn't do anything to help the situation.

"Everyone had hoped that the automaker saga would come to an end, but lawmakers are not letting that happen."

It might just be coming to an end. Thank god for Chapter 11. Chapter 11 is in the best interest of the automakers - only then will they be able to fully restructure their obligations.

Why should consumers run out and spend more money than last year (which is what everyone would like to happen)? Should they not start saving for retirement now that they just lost half their retirement funds? Should they not start paying off debt now that many are within 5 years of retirement? Some people don't have future earnings to borrow against. I know that by cutting back on spending it will only further hurt the economy - but perhaps it wasn't sustainable the way it was being operated.

2008 Dec 12 04:43 PM

[NOWHEREMAN:]

Opec will make its decision after the Fed makes its own which will be influenced by worse than expected results from Goldman. (Which I believe will approach - $10 a share.) The Mark to Market Rule is still in Place, as a new Bank with the Illinois and Ponzi news, I believe they will finally acknowledge their Tier 3 valuations.

If The Tarp has been depleted by an Auto bailout on Monday, Goldman could drop to $40 without anyone's possible assistance.

Currently the market has the Fed's factored as a 25 basis point cut. If Goldman tanks as predicted, it could be changed on the fly to a 50-75 basis point cut.

It is going to be a very interesting week. IMHO

PS Morgan Stanley reports on Friday.

2008 Dec 13 12:09 PM

[Big K:]

Here's another Seeking Alpha columnist calling for a collapse into a depression. It is important for people to stop listening to writers like Kathy Lien because they are trying to talk everyone into a fearful deflationary cycle by circulating articles like this. This nattering nabob will dismiss any possible good news as noise and blow out of proportion any bad news as continuing the trend down. When the economy turns around and assets begin to reflate, these types of writers will do a 180 and be predicting bubble-like growth without bounds. Why is it the gas stations were struggling when the price of gas was high? Now they are struggling when gas prices are low? Nobody can win with this writer.

Tip tor writer: Don't just pile on the bad news after it has already happened or is obvious (like retail sales will be lower). We already know this. Try to give readers some vision they can use!

2008 Dec 13 02:08 PM

[Urbane Gori...:]

Yes... Let's all ignore the reality of our world... Instead, put on your rose colored glasses. After all, why would any one of us wish to be treated as adults... Pretending you don't have cancer will **always** cure it.. Geez.. Gimme a break. Isn't that what got us here in the first place..If you want Pollyanna treatment, listen to Larry Kudlow... I'm sure he's still looking for 'Goldilocks' or 'mustard seeds'.. Whatever that is..

Good article Ms. Lien....

jegan

2008 Dec 13 06:30 PM