With the GDP numbers out today, it sure seems everything is ok in Econoland. I had a friend email me this morning asking my thoughts on the numbers. I have taken the time to respond to him in the email that follows along with his original email question to me. It is short and quick and will help you read through the spin you are certain to get today and this weekend about this number:
In light of everything and the great article you wrote "Deflation or hyperinflation?
What do you think of this?
Last quarter was similar in the surprising beat to the upside. The market screamed higher as the "recovery" was here and made headline news.
Then a month later it was revised twice downward, to a point where it actually came in way below expectations. This though hardly made the front page news as it was out of site and out of mind. Had it come out at the real number the day it was expected, the market would have crashed. Also - last quarter, government spending made up 102% of the GDP growth last quarter, meaning that left without intervention, organic growth was still negative. I suspect that this will be the case again. I still need to parse through the whole report today.
A couple of quick thoughts though: Looks like 3.4% of the 5.7% growth is attributable to inventories. Total inventory destocking was very high. It went from about -$150 billion to -$30 billion. So it for sure is still not growing, which means inventories will contribute for another couple quarters, but surely will not keep up at this pace in the 4th quarter. All this means is this 4th quarter GDP will probably be the highest you will see for a long time is my guess. Business inventory grew 2.9%, helped by a 13% increase in equipment and software spending. It looks like businesses cut back too far and have to play catch-up. This confirms what I said in the June Newsletter for Napa Wealth Management when I stated:
Once again, businesses have overreacted and cut their output below demand levels in anticipation of a steeper than anticipated drop in business.
Yes, business has fallen off a cliff, but not as quickly as companies had expected. Over time, we think business will continue to fall. In the short term though, the up-tick in business production will find its way through many different areas of the economy, thus altering the mood of the financial news and shaping investor, con-sumer, and business sentiment. This ‘feel good’ atmos-phere will be around for 2-3 quarters until the reality of demand destruction starts to set in again.
Final sales actually slowed to a growth rate of 1.7% this quarter from 2.3% in the third quarter. Final demand is still not there.
Also - great GDP numbers do not mean that deflation can be the strong force within the economy or that asset prices can not fall. As Elliotwave.com reported on January 6:
Imagine the disappointment the Japanese faced in the 1990s. Their 1980s boom created enough wealth to buy landmarks like Rockefeller Center and Pebble Beach. But the 1990s turned inflation into deflation. Stimulus packages and bailouts failed to prop up Japan's property market and to prevent the deflationary collapse.
Now the United States government is trying to do the same thing.
One argument inflationists make is that the U.S. can’t have deflation because it will simply print enough money to counteract it. But the Japanese tried that and failed, but interestingly, it did succeed in holding up one economic statistic -- the GDP number. Even as Japan's stock and real estate bubbles imploded (commercial properties fell by 87%!), Japan's GDP continued to press higher, as seen in the chart. (Source: Richard Koo, Chief Economist, Nomura Research Institute.)
The ivory-tower idea that the U.S. can create inflation via the printing press has the real-world example of Japan as a case study against it. In fact, Japanese 3-month yields have been below 1% since 1995, which shows that deflation can persist for a long time despite the supposedly inflationary policies such as low interest rates, quantitative easing and budget deficits.
All in all - enjoy this high number while it lasts, but don't buy the recovery spin you will hear on the news all weekend. As a matter of fact - go enjoy your weekend and turn off the news!
Information Sources: Elliotwave International, Realmoney.com, Nomura Research Institute
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