'Goldilocks' Scenario in Danger

| About: SPDR S&P (SPY)

On CNBC, the pundits are talking about how the most recent spate of data has put Goldilocks scenario in danger. I must admit to finding it amusing how much faith so many players had put into Goldilocks, a most unusual and unlikely scenario.

The latest data forces me to revise my 50% possibility of a recession in 2007/08 up to 60%. GDP for Q4 '06 is likely to be between 0.5% - 1.5% (or worse, if Holiday sales keep trending softer).

As far as the Fed, this data suggests that the jawboning about inflation will remain just that -- while we still expect the Fed to cut before 2007 comes to an end, the odds of a hike anytime soon have just dropped significantly.

Given the awful PMI and ISM data -- they both broke the key "50" demarcation -- one may be wondering how GDP data ended up getting revised upwards. The answer comes from the way GDP is constructed. But even more importantly, observe which the components that increased the revised GDP -- these are symptomatic of a slowing economy:

Revised higher:

Government spending (0.05%)

Inventory Build (0.26%)

Imports (0.39%)

Revised lower:
Exports were revised 0.2% lower.

Consumption was revised 0.14% lower

Inventory build, government spending and imports, was responsible for virtually all of the 0.6% upward revision in GDP. Consumption, 70% of the US economy, is slowing.

Why are Businesses inventories increasing? Some pundits have claimed this is a bullish sign, an "anticipation of increased demand." I doubt this. We have seen recent CEO surveys which point to major negative sentiment amongst the usually cheery Execs; Durable Goods tumbled 8%, and Housing and Autos are likely already in a recession. My guess is that Just-in-time-inventory is easier to ramp than it is to slow down.

And while Reuters reported that "Business spending on inventories rose, increasing sharply to a $58 billion rate from the $50.7 billion earlier estimated." Inventories builds have increased at a faster than usual pace -- implying that this was (whoops!) unintentional.

Given the drop in both Durables and Capex, I am somewhat incredulous over Business spending being revised upward to show a 7.2% gain (versus 6.4% advance)