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GDP Data Not the Golden Goose

While the GDP report this morning is being spun as "excellent" news, the underlying data largely jives with more sober expectations. The improvement in industrial production is certainly welcome (July Chicago PMI came in at 43.4, compared to the six-month average of 37.3), but consider that any reading below 50 is still considered contraction. Furthermore, the touted "silver lining" is the cratering of inventories, implying that future improvements in inventory readings will push GDP higher than expected. Note however that this is precisely what we should expect to see at this stage of the game - inventory restocking. Everyone was afraid of their shadow six months ago, preparing for apocalypse. Now they realize the world is not coming to an end, and need to put bread back on the shelves. If you subscribe to the notion that the stock market moves six months ahead of developments in the economy, then this current "retracement" rally is likely the pre-billing for inventory restocking over the next 3-6 months. The real deal-killer in the data is the continued decline in sales and consumption figures. You cannot have a real recovery without demand. So the next few months may look like a recovery, but what will it feel like? Companies need to satisfy basic demand (we are still a $10+ trillion dollar economy after all), but it certainly won't feel like X-mas.

Taking forecasts for what they are, it will be interesting to see what sort of back-to-school and pre-holiday consumer demand materializes this Fall. The seasonal effect may help fuel excitement over the recovery, but investors should eyeball the year-over-year comparables, not the estimates (which are already low). Sales should continue to stink. Many economic forecasters believe this current period reminscent of the '80-'82 double-dip recessionary period, and expect the U.S. economy to slip again on unemployment and continued lackluster consumer spending some time in early '10. While this is not particularly evident in the stock market at present, a continued drought of key underlying data would back up this forecast, and would suggest a more substantive correction when the market does finally give up the ghost.
As an aside, bullish sentiment data finally surged on yesterday's spring-loaded rally. This is the kind of thing - sentiment rush on short-covering - that helps exhaust a move. Stay tuned.