Interest Rate Roundup

Thursday, July 31, 2008

Q2 2008 GDP, jobless claims stink up the joint

I'm not going to sugarcoat this morning's economic data. It stunk to high heaven. A few details:

- Q2 2008 Gross Domestic Product grew just 1.9%, below the average forecast for a 2.3% rise. Q1 2008 growth was revised down slightly to 0.9% from 1%. Moreover, Q4 2007 GDP was slashed to NEGATIVE 0.2% from positive 0.6%

- Personal consumption was +1.5% in the quarter, vs. a forecast of 1.7%. Durable goods consumption was weak (-3%), while services spending was up just 1.1%, the worst reading since Q1 2001.

- Gross private investment plunged at a 14.8% rate, the worst showing since Q4 2006 (-15%). Residential fixed investment (think housing) tanked 15.6%. That’s less than the -25.1% reading in Q1, but the 10th consecutive quarter of declines.

- Business investment in equipment and software was very weak: -3.4% vs. -0.6% a quarter earlier. That’s the worst reading since Q4 2006 and it shows that businesses are following consumers and cutting back on spending.

- The “good news” was on the inflation front. The GDP price index rose just 1.1% vs. a forecast of 2.4% and a revised 2.6% in Q1. The core PCE price index rose 2.1%, slightly higher than the 2% forecast, though that's down from 2.3% a quarter earlier.

What about jobless claims? Fasten your seatbelts. Initial jobless claims soared to 448,000 in the week of July 26 from a revised 404,000 in the prior week. That was way higher than the 393,000 forecast and the worst reading since mid-April 2003. Continuing claims climbed to 3.282 million from 3.097 million, the highest since December 2003.

The market reaction? So much for the good feeling engendered by the ADP surprise. Long bond futures are up 30/32 as I write, while 2-year Treasury Note yields are down 11 basis points to 2.52%. The dollar index is down 37 bps to 72.96, S&P futures are off 8 points, and spot gold is up almost $12 an ounce to $918.


  • This morning the government came out with its first stab at the second quarter GDP numbers, as well as revisions to past periods. While the headline growth of 1.9% (all percentages are annual rates) was a bit less than the market was expecting, it was far from recessionary. However there appears to be far less to the number than meets the eye, and the revisions were generally to the down side. Each of the last three full years was revised down. Growth in 2005 is now seen as having been 2.9% rather than the previously reported 3.1%, for 2006 it was 2.8% not 2.9% and for 2007 it was 2.0%, not 2.2%. Within 2007, there was an upward revision to the second quarter, but a big downward revision to the fourth quarter. Growth in the fourth quarter was actually -0.2% rather than the plus 0.6% number that had been in use up until now. The first quarter was revised down to growth of 0.9% from 1.0%.

    Within the second quarter numbers there was some good news. The change in private inventories actually subtracted 1.92 percentage points from growth. Usually declines in inventories are made up in later quarters, so one might be tempted to argue that the second quarter was much stronger than the headlines let on. Real final sales were up 3.9%, which is a fairly healthy showing. What were the drivers of GDP growth in the second quarter? Personal Consumption Expenditures (PCE) added 1.08 points to GDP growth (i.e. 57% of the 1.9% total growth), largely due to strong showings for Non-Durable Goods and Services, while Durable Goods sales were a drag on growth, most notably vehicle sales which subtracted 1.07 points from growth. The PCE growth was much more significant than in the first quarter when it added only 0.61 points to growth.

    Building was a big help, as Investment in Non-Residential structures was up 14.4%, adding 0.51 points to growth. Residential Construction continued to be a drag on growth, but less of one than in the first quarter (or the fourth quarter for that matter). It fell 15.6%, subtracting 0.62 points of growth, which was not as bad as the 25.1% decline subtracting 1.12 points from growth in the first quarter.

    International Trade was the real hero of the quarter, Exports surged 9.2% adding 1.16 points to growth while imports fell 6.6%. Falling imports add to growth in the GDP calculations and that decline added 1.26 points to growth in the second quarter. Thus taken together, net exports added 2.42 points to growth, or significantly more than the total growth of 1.9%. This was a big improvement over the first quarter when net exports added 0.77 points or the fourth quarter when they added 0.93 points to growth.

    Higher government spending also added to growth. Overall Federal spending grew 6.7% adding 0.48 points to growth, of which 0.36 came from defense and 0.12 came from increased Non-Defense spending. In the first quarter Federal Spending added 0.41 points to growth while in the fourth quarter it actually slightly subtracted from growth (0.04 points). Increased State and Local spending added 0.20 points to growth.

    Ok, now that we have gotten all those numbers out of the way, what does it mean? Well clearly the stimulus checks helped with PCE, but it is interesting to mote that most of that went for non-durable goods like food and energy, not to durable goods like autos. Second debasing the currency can help growth at least in the short term, as the weak dollar is clearly a factor in the strong net export showing.

    The debasing the currency part brings us to the real fly in the ointment in this release, and a reason that every one of the numbers cited above should be taken with a few pounds of salt. We are talking about real GDP here, not nominal, which grew at a very low 3.0% following 3.5% growth in the first quarter. Real GDP depends pretty critically on the implicit price deflator used to translate nominal GDP into real GDP. The government would have you believe that inflation in the second quarter, at least the inflation measure used to calculate GDP, was running at just 1.1%, down from 2.6% n the first quarter and 2.5% in the fourth quarter.

    Unless one has recently ingested large quantities of peyote, that is a very hard number to believe. Now I don’t like to say bad things about the ref, it usually is just an excuse used by a bad coach, but really now folks, this simply does not pass the smell test. Every other measure of inflation was far, far higher than this, and was accelerating in the second quarter. The CPI rose at an annual rate of 10.3% in the second quarter and was up 5.0% on a year over year basis, the PPI was up at a 14.3% rate in the second quarter and was up 9.1% year over year. I know there are technical differences in how the indexes are constructed, and that the implicit price deflator is designed to measure domestic inflation and much of our inflation has been imported, but these are HUGE differences. Plug in any realistic measure of inflation and the growth vanishes.

    I have no proof of anything nefarious going on here, but I have yet to see a convincing explanation for this very low inflation number. Then again, this is an administration that had the VP go over to “closely question” any CIA analysts who were not on board with the idea that Saddam was about to launch a WMD attack on U.S. cities. It is an administration that in job interviews to fill non-political carrier prosecutor positions at the Justice Department questions like “What is it about George Bush that makes you want to serve him?” It does not take a tin foil hat to think that just perhaps someone was leaning on a few G-10’s at the BEA, to “reexamine” their inflation assumptions for the report. If anyone in Congress asks, just claim executive privilege and stonewall them. Of course it could be some unexplained technical factor or something going on with seasonal adjustment, but anyway you slice it, the inflation number which is central to this report, looks very fishy.

    I expect this number will be revised down over the course of time

    By Anonymous Anonymous, at July 31, 2008 at 6:29 PM  

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