Hey, Chairman Ben - The Economy Is Decelerating

by: Steven Hansen

Earlier this week, we issued our Economic Forecast August 2013: Economy Slowing To a Crawl.

Our forecast was based on data from several sectors not expanding or in slight contraction. Then the Advance Estimate of 2Q2013 GDP was released last Wednesday, which estimated growth at 1.7% - but the BEA revised GDP back to 1929 including revising 1Q2013 growth from 1.8% to 1.1%. So would one conclude that GDP growth is improving?

Advance GDP estimates are nothing more than wild guesses unless the economy is stable between quarters. However, the economy has not settled down since the Great Recession and continues to oscillate. Per the BEA, the real changes between 1Q2013 and 2Q2013 are:

  • lower personal consumption (GDP negative)
  • higher non-residential investment (GDP positive)
  • higher exports (GDP positive)
  • higher imports (GDP negative)

GDP hocus-pocus believes that a consumption of an imported item is economically negative. Consider:

  • imports are economic tattle-tails;
  • most of the non-oil imports are goods, and as we all know goods production is not a big employer;
  • imports are a worry for those who have balance-of-payment concerns;
  • consumption of imports is economic activity.

Figure A

There is a lag between the government's reporting of import data (red line Figure A - which is preliminary through May 2013) and a multitude of import data points which have shown good correlation to the final government reported import data. Without fear of being contradicted with final data - both imports and exports are collapsing in the USA and globally.

Warren Mosler recently tossed up a graphic (Fig 1 below) from Nomura showing there has been a broad-based weakening in Asian exports through June 2013:

Import Growth at West Coast ports is decelerating but still slightly positive year-to-date. If trends continue, imports will be in contraction year-to-date in a month or so. The latest data is from June 2013.

Unadjusted Year-over-Year Change in Container Counts - Ports of Los Angeles and Long Beach Combined - Imports (red line) and Exports (blue bars)

Econintersect is not optimistic that the economy is improving as many of our forward looking data points are decelerating and some are in contraction. Many will point to improving employment dynamics as signs of economic growth, and I too will argue the more jobs the economy can grow acts as a multiplier for future growth. However, there are dynamics which create jobs growth and we are projecting these will begin to decelerate in a month or two.

For those who believe the jobs report was not that good, I offer an alternate conclusion in my instablog post, which includes my normal weekly economic wrap.

I found the FOMC meeting statement this week describing economic growth as "modest" (instead of "moderate"), interesting as modest means "relatively moderate, limited, or small." I suspect the FOMC knows full well the economy has decelerated but does not want to use those words. Will this affect tapering which most believe will happen within the next few months? My opinion is that the economy might be at the absolute limit of effectiveness of QE, and is now transitioning into a period where it might do more bad than good.

I am far from suggesting there is a recession coming based on the data to date. I am suggesting the economic dynamics are far from strengthening.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.