GDP: Here's a More Realistic Look

The backward revision economic data train continues, this time in GDP, which came in at a "better" than expected 1% while the prior quarterly data was adjusted significantly downward from -5.5% to -6.4%. Additionally, per a brand new revision to the way GDP data is presented, the GDP decline demonstrated over the past year is now the largest since World War II. Current quarter jiggering aside, downward revisions to prior quarters have left the decline in real GDP at -3.9% in the year through Q2. And to demonstrate, the severity of this downturn, the Q2 data concluded the first three-quarter consecutive period of falling GDP since 1953-1954. (click on chart to enlarge)

Economic indicators that many were looking to for an advance signal of the inflection point of the recession did not materialize. Most notably, consumer spending fell a more than expected 1.2%, after a 0.6% improvement in Q1, and even the Q1 blip was merely a function of one-time tax rebates that concluded in May. On an adjusted basis excluding the benefits of one-off consumer fiscal stimuli, the consumer deterioration is truly unprecedented. As Rosenberg puts it:

Imagine, government transfers to the household sector exploded at a 33% annual rate, while tax payments imploded at a 33% annual rate and the best we can do is a -1.2% annualized decline in consumer spending in real terms and flat in nominal terms? What do we do for an encore? In the absence of the fiscal largesse, it is quite conceivable that consumer spending would have shrunk at a 10% annual rate last quarter!

Business investments continued their downward trajectory after an unprecedented 39.2% plunge in non-residential investment in Q1, to be followed by another 8.9% drop in Q2. Undoubtedly this continued drop makes the talking heads giddy that after such a massive two-quarter collapse, the only logical way in Q3 is up. This remains yet to be seen.

Another major negative data point was inventories, which fell by a record $141 billion in Q2 (click on chart to enlarge). Yet due to the major drop in Q1, this only accounted for a 0.8% decrease in GDP, which was less then expected. And keep in mind that this percentage drop was nearly completely offset by increased governmental defense spending! Nothing like Uncle Sam to keep plugging the holes as they appear.

Furthermore, per the imposed revisions, there were notable changes to the personal savings rate: the Q1 number was revised downward to 4.0% from 4.3% pre-revision, however the negative savings rate in 2005 was revised to a positive. The downward revision also affected productivity data: output per hour worked was weaker in 2008 than previously reported: whether or not this a cyclical side-effect of the biggest economic collapse in 70 years remains to be seen (click on chart to enlarge).

In summary, employment, industry data, and profits were under severe pressure over the past year, and downward revisions to growth in the year behind us are not much of a surprise. The concern is that while governmental spending was critical and necessary over the past 2 quarters to keep the collapse from being unprecedented, this form of governmental intervention is merely a non-recurring event. Try as he might, Obama is helpless to singlehandedly prop up the 70% of the $14 trillion of US GDP which is accelerating its weakening support of the economy. The increase in total unemployment rolls will put further pressure not just for continued government subsidies in all sectors of the economy (to the chagrin and detriment of key U.S. trading partners), but also for the need of Stimulus II. Without it, disinflation conversion into outright deflation is a practical certainty.

Some more observations on the flight to deflation from Rosie:

And, it is not just labour income that is still in deflation mode. Practically all forms of income are deflating from a year ago — interest income is down 4.5%, dividend income is down 23.0% and proprietary income is down 8.0%. The only income that is really going up is the income from Uncle Sam, which is up more than 10.0% and we have reached a point where a record of nearly one-fifth of personal income is being accounted for by paychecks out of Washington.

And as David concludes:

But it should be known that Uncle Sam himself does not create income — he borrows cash from current bondholders and future taxpayers. Not the stuff that seems deserving of a 760x multiple.

It is a sorry state where the only thing that is propping the world's greatest economy are promises of improvement and confidence games via the traditional media, with hopes of propping up a stock market which has long since ceased to be an indication of economic reality. The convergence between the S&P and the underlying fundamentals is, unfortunately for the administration, inevitable, especially since the government has now single-handedly taken over a key portion of major GDP output industries. Numerous empirical studies, especially from communist block countries, demonstrate just how "effective" the government is, when it decides to get directly involved in running a substantial portion of the economy.

Comments

[Dirtnap:]

Just as a preamble, I would like to point out that I agree strongly with the conclusions of the author.

I will point out one point of contention: the conclusion that government involvement in the economy always ends poorly. This is not necessarily the case, but it most certainly is the case currently (and for the past few decades) here in the U.S. A great counterpoint would be the case of China, where the government is heavily involved in the economy, but these decisions are being made by apparently much more savvy individuals (who consequently don't have to worry about campaigning for re-election.)

Aug 03 01:07 AM

[bearfund:]

On Aug 02 05:29 PM davidbdc wrote:

> And how exactly would you propose to pay down the national debt and
> reduce the deficit if its not a combination of cutting spending and
> raising revenue??

A good old-fashioned default. Suck it, Mr. Liu; you can now join the other 99% of the world in losing money after buying overpriced assets.

Aug 03 03:03 AM

[Bill S. Friend:]

The best the Fed could hope for now is 300% inflation over ten years. Unfortunately the Dollars reputation of strength has continued in spite of the manipulations by Fed and Treasury.
Clearly the patient has died and the resultant script is reminiscent of "Weekend at Bernies" where the host dies but the party continues. The facts are being covered with a hat and sunglasses and movement is achieved by the means of strings and pulleys.
A failed system in its death throes, attempting to maintain an air of normalcy, jeopardizing the prosperity of our children and grandchildren.

Aug 03 06:03 AM

[Michael Clark:]

Actually, this is a very astute comment. Deflation is a kind of spiritual death experience. And these are the stages one and one's society goes through.


On Aug 02 09:42 AM Troy Ounce wrote:

> And after the denial will come the anger, then the bargaining, depression
> and finally acceptance. I would guess that, given the absence of
> anger, the US is still in the denial phase.

Aug 03 06:18 AM

[Moon Kil Woong:]

Actually, stimulus will only accellerate into next year from Obama's stimulus bill. As we can see, putting aside the last quarter GDP downward revision to make this quarter look better, the governments increased contribution to GDP has prevented everything from looking so bad while also explaining why long term bond yields have risen. Although government spending adds to GDP by giving public servants money to spend, it creates very little in it's wake. Thus not only does it lead to a huge deficit run up but also adds more cash chasing real goods and services.

Although the Fed would like to say that's not a problem since there is too many goods and services that is a falehood (no inflation says Greenspan). As demand falls so does production of goods and services. Thus as a savvy business person, not knowing if demand will be weak or somewhat stronger you tend to cut back but keep stocking the raw materials to make up production just in case it firms up. Thus we get a commodities disconnect. It's bad enought that China is also using commodities to try to spend/hedge it's dollar bet. In reality, the government is playing with fire.

Sure they can artificially spend until they can't to make things look "bearable" for a short while like Japan. But in fact they are digging a great economic hole to dump a whole generation into. Unlike Japan, they are also threatening to pour inflationary oil down the economic hole we are in and set it on fire. In that case, we most certainly will end up a lot more than Japan did.

Thanks for the read again Tyler. Hopefully we will stop this silliness before someone decides to see what happens when they light a match.

Aug 03 07:16 AM

[Maxe Paul:]

You are listening to the guy who started the crisis, who now says it's over? WOW you are one trusting individual, good luck!


On Aug 02 02:39 PM JCC wrote:

> Today Alan Greenspan said that the recession had ended, predicted
> a possible 2.5% growth rate for the US economy this quarter:
>
> “We may very well have 2.5 percent in the current quarter,” Greenspan
> said in an interview today on ABC’s “This Week” program. “The reason
> is there has been such an extraordinarily high rate of inventory
> liquidation that the production levels are well under consumption.”
>
>
> Roubini is still forecasting an end to the recesssion this year followed
> by 1% growth rate.
>
> While I have tremendous respect for Roubini, I hope that Alan is
> right, and current green shoots gives hope.

Aug 03 09:18 AM

[Heaven, Hel...:]

>> As we can see, putting aside the last quarter GDP downward revision to make this quarter look better <<

Is this what really happened here? Looking at the revised GDP numbers, Q4'08 was revised "upward" from -6.3% to -5.4%, with Q1'09 being revised downward from -5.5% to 6.4%, so net-net it appears as though they were basically a wash, making the last quarter of 2008 look "better" and not Q2'09.

Aug 03 09:43 AM

[Broxburnboy:]

The major problem no one wants to mention is the cost of the "war"... the invasion, occupation and subjugation of backward countries on the other side of the world, which have always successfully resisted such interference. GDP directed toward this occupation is lost, gone forever
in a mutually destructive "boom". Investing huge amounts in liabilities (military hardware and occupation expenses), only generates more liabilities. Consider if those funds had been spent rebuilding Cleveland, Detroit, New Orleans or funding State infrastructure programs.
No wonder the USD is devalueing vs. other more prudent countries.
There can be no end in sight until these spendings are reversed, but they are accelerating..

Aug 03 11:28 AM

[Poor Texan:]

On Aug 03 11:28 AM Broxburnboy wrote:

"The major problem no one wants to mention is the cost of the "war"... the invasion, occupation and subjugation of backward countries on the other side of the world, which have always successfully resisted such interference."

As I recall, some "backward country" declared war on us by destroying several buildings and killing some 3,000 American citizens. Maybe we should have waited for an invasion to respond so that our GDP wouldn't be burdened in the interim?

Aug 03 01:10 PM

[The Recusant:]

Poor Texan: All the jets, tanks, and new destroyers will not stop terrorist attacks. Terrorism is a different kind of war best fought through covert operations and police strategies. Shaking sabers and fear mongering is a HUGE part of why we are in this current economic situation. Pulling most of our troops out of the hundreds of foreign bases and closing most of them down would be the prudent thing to do...but of course the the weenies who still fear "commie" invasions would never do what's prudent.

Aug 03 02:47 PM

[PainfullyAware:]

Poor Texan - What Country Was That?

If the buildings you are referring to were the World Trade Centers In NY then you may want to review Which Countries We Invaded After Our Government "Miraculously" Knew Exactly Who Was Responsible For Their Destruction. I do find it a bit confusing and raises many "Questions" that the list of "Perpetrators" were mainly Saudi Arabian; yet no recourse or condemnation has occurred for this country in the aftermath.

In Totality the events are Unusual.

The More You Know The Less Certain You Will Be.


On Aug 03 01:10 PM Poor Texan wrote:

> On Aug 03 11:28 AM Broxburnboy wrote:
>
> "The major problem no one wants to mention is the cost of the "war"...
> the invasion, occupation and subjugation of backward countries on
> the other side of the world, which have always successfully resisted
> such interference."
>
> As I recall, some "backward country" declared war on us by destroying
> several buildings and killing some 3,000 American citizens. Maybe
> we should have waited for an invasion to respond so that our GDP
> wouldn't be burdened in the interim?

Aug 03 03:10 PM

[marco caricom:]

1. Term limits for all elected officials....(no 'job for life', no tenure).
2. Eliminate the pork and other total expenditure waste .
3. Balance the budget.
4. Eliminate lobbying/lobeasts.

If we can not as a country live within our means under our current taxation levels we may as well throw in the towel...


On Aug 02 05:29 PM davidbdc wrote:

> And how exactly would you propose to pay down the national debt and
> reduce the deficit if its not a combination of cutting spending and
> raising revenue??

Aug 03 04:27 PM

[Broxburnboy:]

Iraq didn't have anything to do with 9/11, but the response has been inneffective and continues to bankrupt the country.


On Aug 03 01:10 PM Poor Texan wrote:

> On Aug 03 11:28 AM Broxburnboy wrote:
>
> "The major problem no one wants to mention is the cost of the "war"...
> the invasion, occupation and subjugation of backward countries on
> the other side of the world, which have always successfully resisted
> such interference."
>
> As I recall, some "backward country" declared war on us by destroying
> several buildings and killing some 3,000 American citizens. Maybe
> we should have waited for an invasion to respond so that our GDP
> wouldn't be burdened in the interim?

Aug 03 04:46 PM

[market mojo:]

Which country was this?


On Aug 03 01:10 PM Poor Texan wrote:

> On Aug 03 11:28 AM Broxburnboy wrote:
>
> "The major problem no one wants to mention is the cost of the "war"...
> the invasion, occupation and subjugation of backward countries on
> the other side of the world, which have always successfully resisted
> such interference."
>
> As I recall, some "backward country" declared war on us by destroying
> several buildings and killing some 3,000 American citizens. Maybe
> we should have waited for an invasion to respond so that our GDP
> wouldn't be burdened in the interim?

Aug 03 05:51 PM

[jhartz:]

Out in the hinterlands the people are starting to make their discontent known to the politicians. No one is really listening to their protests yet.

Sadly, it will probably take some form of armed action to let the government finally understand the underlying consequences for their traitorous betrayal of American citizens.

Will we have to see a spate of violent criminal acts against our constituted authorities before they get an understanding of how unhappy the American people are to see their country being economically crippled?

How many political officials will have to be shot at before "REAL CHANGE" starts to take place? I never thought I'd hear these types of things being advocated. I'm hearing calls for action every day now.

I urge our political leaders to retreat from this abyss they're heading this country towards. We've lost most of our faith in the political process already. You take away all our hope and we'll have no choice but to engage you in a battle to regain control of the processes that once made ours the greatest country ever.

Aug 03 10:05 PM

[Mark Bern:]

In my business, we buy houses for back taxes. I am finding more and more that previous owners have done what we are doing, made a minimal investment to make the property livable and then rented it without paying the taxes. They can collect the rent for at least three years before having to give up the property. They are slum lords and I can't stand them. But, truth is, they exist and are growing in number.

We do things the old fashioned way, but the property, fix it up, rent it, and then sell to a new investor or homeowner. We also pay the taxes. But I suspect that our slum lord competitors are making more in the short term. They can get double what they invested over a three year period if they choose carefully. We end up having more invested in the properties and hold them longer.

My point is that greed makes people do the darndest things and we may be entering into a period of higher tax avoidance at the local level. State and local governments are getting hammered and this is just one more nail in the proverbial coffin.

While my comment doesn't have much to do directly with another provocative article by the author, I just thought that it might be interesting to reflect upon yet another systemic erosion of the fundamentals that won't show up in the official reports.

Aug 04 01:24 AM

[Homer II:]

Broxburnboy said, "...Consider if those funds had been spent rebuilding Cleveland, Detroit, New Orleans or funding State infrastructure programs..."

You must be kidding right? I know you must be a troll.. to pick those 3 rotted out, ghetto-infested havens of fourth-generation welfare-sucking, useless wagon-riders and then, as if rebuilding them would somehow result in their citizens becoming useful, hard-working, wagon-pushing productive populations. Yeah, right!

I think GWB made the better choice.. by a long shot!!!

Aug 04 03:24 AM

[commoinsens...:]

Iraw didnt invade us turd....


On Aug 03 01:10 PM Poor Texan wrote:

> On Aug 03 11:28 AM Broxburnboy wrote:
>
> "The major problem no one wants to mention is the cost of the "war"...
> the invasion, occupation and subjugation of backward countries on
> the other side of the world, which have always successfully resisted
> such interference."
>
> As I recall, some "backward country" declared war on us by destroying
> several buildings and killing some 3,000 American citizens. Maybe
> we should have waited for an invasion to respond so that our GDP
> wouldn't be burdened in the interim?

Aug 04 08:03 AM

[JCC:]

Well Maxe, others are now predicting 3% growth for the second half of this year. Goldman Sachs, The Federal Reserve, and others came out with similar predictions. The market appears to be accepting this conclusion.

I done't know how long this will last, but right now, the green shoots are growing rapidly.

On Aug 03 09:18 AM Maxe Paul wrote:

> You are listening to the guy who started the crisis, who now says
> it's over? WOW you are one trusting individual, good luck!

Aug 05 10:51 PM

[marco caricom:]

Thanks, I should have added that...

(5.) Living within our means is good for gov. as well as individuals and raising taxes and printing press monetary abuse should not always be gov.'s first response.


On Aug 03 04:27 PM marco caricom wrote:

>
> 1. Term limits for all elected officials....(no 'job for life',
> no tenure).
> 2. Eliminate the pork and other total expenditure waste .
> 3. Balance the budget.
> 4. Eliminate lobbying/lobeasts.
>
> If we can not as a country live within our means under our current
> taxation levels we may as well throw in the towel...
>
>
> On Aug 02 05:29 PM davidbdc wrote:

Aug 08 12:36 PM