GDP Euphoria: An Artificial High

The bulls went ga-ga over Thursday's "better-than-expected" data on U.S. gross domestic output. But if you look at how the figure was derived -- which seems to be beyond the capabilities of most Wall Street strategists, TV pundits, and stock traders -- you find that the "good news" should have had a big fat asterisk (*) next to it.

In "Thank You Cash for Clunkers," for instance, EconomPic details a less-than-reassuring reason for the jump through the use of an eye-opening graphic:

Motor vehicles added a whopping 1.66% of the 3.5% growth in Q3 GDP. More specifically, motor vehicle output was up... wait for it... 157.6% on an annualized basis.

Source: BEA

In "Don’t Break Out the Champagne Yet: Cause for Concern in GDP," the Wall Street Journal's Real Time Economics blog relies on an old faithful -- the written word -- to dissect a so-called sign of recovery that is actually much less than it seems:

It’s great to be growing again, but two lines in Thursday’s GDP report have the potential to be temporary and warrant caution.

The first one is the critically important 3.4% pop in personal consumption expenditures, which was the biggest gain since the first quarter of 2007, when the housing bubble was still in the early stages of deflating. A very large chunk of that came from car sales, which accounted for a full percentage point of the overall increase in GDP for the quarter. The car sales increase was driven in large part by the temporary cash-for-clunkers program. After surging in July and August, retail car sales dropped 10.4% in September, suggesting the auto sector won’t provide such a big boost again any time soon.

The other piece was homebuilding, which rose for the first time since 2005. Home building didn’t just rise; it jumped 23.4%, which contributed another half percentage point to GDP growth. It is possible that a real upturn in housing has begun. But there might also be temporary factors at play, most notably the federal homebuyer’s tax credit. That’s got better prospects of being extended than cash-for-clunkers, but it won’t last forever. That, and still-large inventories of unsold homes in many markets, could be a weight on the housing recovery.

In short, Fed officials are surely pleased to see the GDP increase. But they’re likely to be a little wary of some of these temporary factors and reluctant to extrapolate above-trend growth from the numbers.

Comments

[Mad Hedge Fund Trader]

iyt A few years ago, I went to a charity fund raiser at San Francisco’s priciest jewelry store, Shreve & Co., where the well heeled men bid for dinner with the local high society beauties, dripping in diamonds and Channel No. 5. Well fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area’s premier hotties, who shall remain nameless. Suffice to say, she has a sports stadium named after her. The bids soared to $6,000, $7,000, $8,000. After all, it was for a good cause. But when it hit $10,000, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer’s remorse came to me and offered his date back to me for $9,000. I said “no thanks.” $8,000, $7,000, $6,000? I passed. The current altitude of the stock market reminds me of that evening. I have just had one of the best years of my career, and have cashed out of most of my positions so I can greedily await payment of my year end performance bonus. If you rode gold from $800 to $1,050, oil from $35 to $80, and the FXI from $20 to $40, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it does now? I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands. But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: “There is a time to fish, and a time to hang your nets out to dry.” At least then I’ll have plenty of dry powder for when the window of opportunity reopens for business. One of the headaches in writing a letter like this is that while I publish 1,500 words a day for 250 days a year, generating about half the length of War and Peace annually, you really need to tinker with your portfolio on only a dozen or so of those days. So while I’m mending my nets, I’ll be building new lists of trades for you to strap on when the sun, moon, and stars align once again. And no, I never did find out what happened to that date.

2009 Oct 30 01:27 PM

[market ace]

The Gov't plastered a 3.5 percent GDP growth rate on the marquee yesterday, and traders acted as though the information had come from God himself. I always expect the stock market to wet its pants when these dog-and-pony shows turn up the wow factor with a laser light show. But did this market surge really indicate that any sane person truly believes that the economy is strengthening as opposed to the gov't just growing out of control on every front?.

The rally felt like it was about 99.99% short-squeeze, with Abbe Cohen’s plump, well flock making up the other 0.01%. But that still begs the question of why Mr. Market should have been so nice to us, providing a fabulous opportunity to unload stocks even though “everyone” knows that the bear rally begun on March 9 is over..Mr. Market is planning to drown all the believers on Friday by savaging bulls that just cannot seem to understand the reality of the economy and want to believe the BS coming from Washington.

2009 Oct 30 01:41 PM

[401KMAN]

Nothing artificial about the jobs report. (the market has reacted - over 200 points down) Well, maybe the part about "jobs saved".

2009 Oct 30 02:35 PM

[thiazole]

Who was squeezing the bears? If the rally was 99.99% short squeeze, then that means they brought it on themselves - that they saw the data, believed it, and covered. But according to you, only insane people would believe that data, so 99.99% of the bears must be insane, according to your logic.

Or the more likely scenario is that the market reacted accordingly to yesterday's GDP data, and that today investment managers are using that GDP strength from yesterday as a base to lock in some profits today.

But if you are convinced that the bears who were holding short positions are insane, that is your right.

On Oct 30 01:41 PM market ace wrote:
> But did this market surge really indicate that any sane person
> truly believes that the economy is strengthening

> The rally felt like it was about 99.99% short-squeeze, with Abbe
> Cohen’s plump, well flock making up the other 0.01%.

2009 Oct 30 03:06 PM

[thiazole]

It is only artificial when it disagree's with your bias, right? I think that is the funniest part of the bear argument that the government data is "bogus". They use the government's unemployment data to "prove" that the government's GDP data is bogus. I guess the labor department didn't get the memo to fake a recovery.


On Oct 30 02:35 PM 401KMAN wrote:

> Nothing artificial about the jobs report. (the market has reacted
> - over 200 points down) Well, maybe the part about "jobs saved".

2009 Oct 30 03:09 PM

[Carl Spackler]

I read an article yesterday that said that of all the "cash for clunkers" buyers, only 15% would not have bought except for the program. In other words, the other 85% got a free handout and we only marginally increased sales. In fact, that 15% that was increased sales cost about $24,000 per car. Even more tragic, we pushed forward future demand into last quarter, and now all future quarters will be much worse as a result.

Now that just sums up all this government intervention - its expensive, poorly applied, and tends to rob future sales. Cash for clunkers was a microcosm of what was wrong with all government intervention. The market now senses that government money has withered demand at every step. They gave trillions to the banks, yet the banks only are responsible for 35% of all loan activity. What did they do with the money - they reduced loan activity for the last 20 weeks in a row (per many publications). They took their money (plus borrowed more at 1% or less) and bought risk-less fixed income instruments. They could have handed each American $20,000 for the same total bill. At least they would have increased demand, not reduced it.

So what is the moral of the story - when you bet on government intervention being efficient, you will lose. The market is waking up to this and wondering what happens when the government induced "sugar high" disappears and we are left with tepid demand. Can you say Bailout Version II in January?

2009 Oct 30 03:28 PM

[Albertarocks]

On Oct 30 03:28 PM Carl Spackler wrote:

> So what is the moral of the story - when you bet on government intervention being efficient, you will lose. The market is waking up to this and wondering what happens when the government induced "sugar high" disappears and we are left with tepid demand. Can you say Bailout Version II in January?<

You got it Toyota! I don't think the world will tolerate another bailout next time around. I think the entire planet is waking up to the dirty games these thieves are playing and could well react in different fashion next time. If there's another bailout, I wouldn't be surprised if the rest of the world says "here's your bonds back Ben, and don't come runnin' to me next time you need a loan". If that happens, and why shouldn't it?, who's gonna buy the bonds? The FED I guess. Who's left?

How 'bout this Carl! I take a dump and you buy it from me. Then you take a dump and I'll buy it from you. We'll charge each other exorbitant prices for the little brown gems and then go sailing together in celebration of how much money both of us just made. We'll call ourselves bankers too, just for sh$ts and giggles.

2009 Oct 30 03:38 PM

[Carl Spackler]

Funny!

This entire economic episode reminds me of some of the lessons I learned while I was studying economics - in a good economic system, good businesses are allowed to succeed and poor business are allowed to fail. By allowing this, capital will freely be distributed to those businesses that are successful, and poor endeavors are quickly halted. The strong companies create more jobs and thus more money for the workers - which in turn creates more demand.

What we have done is prop up the weak companies who will not be expanding, and starve the best companies of capital which leads to no job growth and further reduction in demand. Assbackward thinking created one big poop shoot in the end. This is basic econ 101, but I guess Obama never took economics in community college.


On Oct 30 03:38 PM Albertarocks wrote:

> On Oct 30 03:28 PM Carl Spackler wrote:

2009 Oct 30 04:25 PM

[carlj]

> the winner ... came to me and offered his date back to me for $9,000. I said “no thanks.” $8,000, $7,000, $6,000? I passed.

Nothing to do with the article, but that story reminds me of Bette Midler in Ruthless People: "Do I understand correctly? I am being marked down?"

2009 Oct 30 07:52 PM

[bob adamson]

The stock market and investor sentiment have swung widely from day to day for the past couple of weeks with the changing perceptions of economic performance. Recently the sense of relief that fueled the market since March has run its course and, while anxiety has not taken its place, uncertainty about the pace and shape of further recovery is assuming a more central spot in investors’ minds. Both the economy and our expectations of it and of the stock market have now reached a wary equilibrium as we search for clearer indications whether the current stable but not yet clearly recovering state of the economy will give way to a mild retrenchment, an uncertain plateau or a further leg up over the next couple of quarters. Consequently, views are decidedly mixed on whether the strong advance in the stock market since March has overshot the mark (and a short term but not deep retreat should be expected) or is simply pausing for a week or so before regaining its upward move. The best guess is that both the economy and stock market will move alternatively up and down rapidly within a narrow range over the next few weeks until the future longer term direction becomes clearer.

2009 Oct 30 08:33 PM

[perceptions_now]

This is a rhetorical question, "what do you think would happen to the economy if" -
1) A National Annual DEFICIT, is increased from around 1%, to 3%, to 13% in consecutive years (in an effort to stimulate the economy) and is likely to stay above 10% in the medium term?
2) A National DEBT goes from around 60% to 100% of GDP, within 10 years and is set to continue rising, on the back of UNFUNDED LIABILITIES, ARISING FROM AN AGING POPULATION, IN THE SOCIAL SECURITY & HEALTH SECTORS.
3) That nations Central Bank acquires "assets" amounting to around 15-20% of GDP. The "assets" are now essentially worthless and the acquisition is made by "printing" more "money". However, the "assets" are still shown on balance sheets at their "former full value".
4) The nation in question had the largest economy (GDP) in the world, by far, equal to the next 3 largest GDP"s combined.

2009 Oct 31 10:53 PM

[JAZZSINGER]

only goverment oficials and top execs will have money when its al over

2009 Nov 19 01:04 AM