Q3's GDP Revision Was Nonsense
Lance Roberts | Nov 26, 2014 02:20PM ET
Since this is Thanksgiving, I want to offer my thanks to you for your readership over the past year. Your comments, suggestions, and debates have been a great source of education and affirmation for me. Thank you.
As we prepare for the annual food fest, and post-Thanksgiving tryptophan-induced food coma; I thought this weekend's reading list should be a bit of a smorgasbord of interesting topics to stimulate your brain cells between naps and football.
Have a happy and safe, if you are traveling, Thanksgiving holiday and many blessings to you and your families.
1) Q3 GDP Upside Revision Was Nonsense
I have written for some time that the real economy has diverged from the governmental reports which have been subjected to mass torturing of the underlying data. The latest report on GDP was just the latest example of the impact of statistical data revisions and seasonal adjustments.
The latest quarter was sharply boosted by an undisclosed Revision to Prior Quarter. The Bureau of Economic Analysis (BEA) reported its second estimate of third-quarter gross domestic product (GDP) growth at 3.9%, up from initial reporting of 3.5%. This was against an unrevised 4.6% pace of second-quarter growth. Importantly, once the third estimate of any quarter is in place, the number is not revised again except for annual benchmark revisions.
That restriction, however, does not apply to the GDP’s accounting-equivalent counterpart, gross domestic income (GDI), which goes through three revisions. The majority of the latest headline growth in GDI was due to a sharp-downside revision to second-quarter growth, which is suggestive that second quarter GDP was also likely sharply slower than previously estimated.
This would correspond with much of the recent economic data such as industrial production, personal spending, and durable goods which have all been consistently weaker than estimated.
The Mystery Of Surging Q3 GDP - Americans Are $80 Billion "Poorer" via ZeroHedge
"The final major datapoint of the day was the Consumer Income and Spending data from the US Dept of Commerce's Bureau of Economic Analysis, the same outfit that yesterday shocked everyone with just how much better US GDP was. Well, today, we learned just where the offset came from. Because while on the surface, both income (+0.2%) and spending (+0.2%) missed expectations of a 0.4% and 0.3%, respectively.
Get The News You Want
Read market moving news with a personalized feed of stocks you care about.Get The AppThere are some rather massive variations between what the BEA reported a month ago, and what it reported today, as relates to all the data issued since March. To wit:
Essentially, the just reported Disposable Personal Income print of $13.109 trillion as of the end of October, is where according to the old, unrevised data US household income was sometime in August. Whatever happened to two months of income? In order to 'suggest' that the US economy had grown by a far greater than expected run-rate, the BEA was forced to revise away personal income, and "assume" these had instead been invested in the US economy, in the form of a surge of durable goods purchases."
The problem with the assumption by the BEA that savings went into durable goods purchases is that just reported durable goods ex-transportation just collapsed by -0.9% in October. Core capital goods fell by 1.3% in October after falling 1.32% in September. As shown in the chart below, the decline in durable goods will likely be reflected by a downwardly revised Q3-GDP number next month.
2) 2015 Is Shaping Up To Be A Turkey by Paul Kasriel via The Econotrarian Blog
"If relatively robust growth in thin-air credit was a major factor accounting for 2014’s bountiful U.S. economic harvest, as I believe it was, then 2015’s “harvest” is likely to be considerably less bountiful. Growth in thin-air credit has already begun to decelerate and is on course to further decelerate in 2015. As mentioned above, the Fed curtailed its purchases of securities more aggressively than I had reckoned a year ago and ended its purchase program in October 2014. Although bank credit has grown considerably faster than I had anticipated, it is not fast enough to compensate for the slowdown in the growth of Fed thin-air credit.
Plotted in the chart below are actual and projected monthly observations of year-over-year percent changes in the sum of commercial bank credit and reserves held by these banks and other depository institutions at the Federal Reserve.
But the dominant factor affecting the U.S. economy in 2015 will be below-normal growth in U.S. thin-air credit. So, as you gather your family around you on Thursday, November 27, to give thanks for our bountiful 2014 economic harvest, bear in mind that next year’s harvest is likely to be a 'turkey' in comparison."
3) The Mistakes We Make And Why We Make Them by Meir Statman via WSJ
- Goldman Sachs (NYSE:GS) Is Faster Than You
- The Future Is Not The Past & Hindsight Is Not Foresight
- Take The Pain Of Regret Today And Feel The Joy Of Pride Tomorrow
- Investment Success Stories Are Misleading
- Neither Fear Nor Exuberance Are Good Investment Guides
- Wealth Makes Us Happy, Wealth Increases Make Us Happier
- I've Only Lost My Children's Inheritance
- Dollar-Cost Averaging Is Not Rational
Also Read: 7-Simple Things that Most Investors Don't Do by Ben Carlson via Wealth Of Common Sense
4) Humorous: How Turkey's Predict Global Market Crashes via Political Calculations
"As you can see in our carefully calibrated chart above, whenever the value of the MSCI World index has exceeded the equivalent live weight of an average farm-raised turkey in the U.S., the index went on to either stagnate or crash. And in 2014, the value of the the MSCI World Stock Market Index has once again exceeded that key threshold, which can only mean one thing.... The climate for investors has changed, and it's time to sell!"
"And if they try to tell you that doesn't make any real sense, you should hold firm and tell them that the correlation is really strong (the R² is 0.9616), which means that the science is settled and that they really shouldn't want to be some kind of climate change science denier."
5) Another Year Of Christmas "Cold Feet" by Jeffrey Snider via Alhambra Partners
"The current release from Gallup shows exactly that, another collapse in spending plans, this year from $781 all the way down to just $720; an 8% drop. That wasn’t all that much better than 2013, which saw an October/November drop from $786 down to that $704."
"Instead, that optimism is cast directly against the sinking tide of the post-2012 slowdown that is not an anomaly but a global trend that does exist even inside the US. The fact that Brazil and China are in such desperate positions is not independent of a US recovery, but very much related, as shown by this persistent and persisting drag of consumption, to faltering US growth. That is unfortunately sharpened by price changes in 2014 which are more severe than both 2013 and what is being measured by official metrics. When revenue is expanding solely on price changes (or more dependent on prices), volume is thus axiomatically shrinking. To some that looks like recovery, but in the real global economy that is growing trouble."
After Pumpkin Pie Read: Did The Fed Save Us From A "Liquidity Trap?" by Comstock Partners
"There have been a number of very sophisticated economists who recently made some presentations on the financial networks discussing just how effective the Federal Reserve was in being able to avoid a “liquidity trap”. One economist in particular used the avoidance of a 'liquidity trap' a number of times as he praised the Fed.
This global deflationary environment has resulted in a Central Bank “bubble” that we believe will end badly both here and abroad! The reason for this difficult deflationary environment all over the world is explained very well in The Geneva report titled "Deleveraging, What Deleveraging?" It explains that, most believed that the 2008 crash (caused by the debt explosion) would result in deleveraging. But, instead, due mostly by government spending, worldwide debt grew rapidly. According to the report, global debt as a percentage of GDP has risen 36 percentage points since 2008, to a record 212%."
After A Second Slice Of Pumpkin Pie Read: Millenial Investors Shouldn't Trust The Market by Meb Faber
"Is that because Millenials are slacker morons? Or are they actually justified in their distrust?
The article mentions the benefit of time to starting early as an investor, as well as the fact that the market has returned about 6.8% real per year since 1871 as a reason investors should stay the course with stocks (since 1900 the number is 5.8% and worldwide closer to 5%)
But here’s the problem – it greatly matters what you pay when you start.
The problem is, of course, where we are now with a CAPE ratio of 26.5. I would argue Millenials are actually smarter than they look and that they are correct in avoiding stocks. That is depressing but is the unfortunate reality."
"I celebrated Thanksgiving the old-fashioned way. I invited everyone in my neighborhood to my house, we had an enormous feast, then I killed them and took their land” ― Jon Stewart
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