3Q GDP Revision: Bad News

by: Karl Denninger

You wouldn't know it, of course -- the market did nothing -- but the Department of Commerce's third quarter GDP report was bad news:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.6 percent in the third quarter of 2010 (that is, from the second quarter to the third quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 percent.

That looks like pretty much a flat report (the former was up 2.5%).

But it's the inside scoop that's the problem.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.7 percent in the third quarter, 0.1 percentage point less than the second estimate; this index increased 0.1 percent in the second quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 0.4 percent in the third quarter, compared with an increase of 0.8 percent in the second.

So "inflation" (price inflation) is either smack up the middle of Bernanke's "desired" band or moderately over it, depending on whether you include the things that everyone needs to buy or not. Since I do include those things, I call it "moderately over."

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $26.0 billion in the third quarter, compared with an increase of $47.5 billion in the second quarter. Current-production cash flow (net cash flow with inventory valuation adjustment) -- the internal funds available to corporations for investment -- decreased $68.4 billion in the third quarter, in contrast to an increase of $61.1 billion in the second.

"Margin collapse," anyone?

Domestic profits of nonfinancial corporations increased $0.3 billion in the third quarter, compared with an increase of $48.2 billion in the second. In the third quarter, real gross value added of nonfinancial corporations decreased. Profits per unit of real value added were unchanged; an increase in unit prices was offset by increases in both the unit labor costs and the unit nonlabor costs corporations incurred.

Yep. Now quit with the QE nonsense and stop manipulating the bond market and corporate leverage. We're getting negative outcomes from these games -- and if we don't cut this malarkey out, that negative outcome may become extremely serious.

I'm suspicious of some of the internal reported data, as I have been before. But what's clear is that PCE (personal expenditures) was revised down, disposable personal income is not increasing much at all (in fact, the torrid 5.5% rate of the second quarter has cooled to +1.7% annualized), and inventories are rising.

None of this is particularly positive, and when added to the trade imbalance (imports/exports) and cost-push pressures, along with the non-financial corporation margin collapse that is increasingly showing up in the data that is now essentially baked into the cake and will inevitably show up either on the shelf or in profit margins, none of this is good for the economy as a whole.

On balance, the report showed no real change, and the differences from the second issue of this report were all negative -- even if only modestly so.