Everyone and their brother will be spinning the second estimate of 2Q2010 GDP which revised growth from 2.4% annualized to 1.6%. As most know, GDP cherry picks certain expenditures and is only one metric of our economy.
GDP leaves so many important economic elements out such as existing home sales, employment and debt which major economists believe are only by-products or results of GDP. Unfortunately, these three economic elements (and a few others) drove the economy into this recession depression.
Economists believe that GDP must grow faster than 2.5% to create jobs.
Many will spin and extrapolate GDP to show we are traveling into the abyss, or that GDP data is only showing slower growth. As a believer GDP is simply a slice of a certain aspect of the economy, I believe this revised GDP of 1.6% is simply confirming other aspects of the economy which showed a slower economic growth trend-line.
GDP reflects about one-half of the total economy. Coincident with GDP’s release, the National Income and Products Accounts (NIPA) are also re-estimated as it is from these tables that GDP is derived.
Here are some graphs which paint the total economy which are produced from the NIPA tables. I am focusing on the income side of the tables – and not the expenditure side which is used by GDP.
Clearly the income side of the economy is improving. Here is GDP’s view of a manipulated portion of the expenditure side of the economy.
The above chart is stacked – in other words the effect of private domestic investment is stacked on top of the effects of government spending which is stacked on top of personal income expenditures (PCE). The weak element is the investment component within GDP. Still, all GDP trend lines remain positive. I have excluded net imports in the above graph as it does not affect the conclusions, and adds a level of complexity as this is a relatively small negative factor.
Again, all GDP has done is confirm that the economy did indeed change in May and June of 2010 to slower growth.
This week my favorite leading indicator – the WLI from ECRI – remained essentially flat at a negative 9,9 – down from a -10.1 of the previous week.
I do not have a quote from Lakshman this week, but we did have a release of the Chicago Fed National Activity Index (CFNAI) this week. The CFNAI is the most accurate coincident index I have found. In summary, the three month moving average was down slightly. However, the CFNAI and the WLI do a good job of predicting the Dow. Here is a rackup:
In short, I am seeing no indication (yet) of any indication that the economy is going negative. The forward looking economic indicators all still have a slight positive bias. The economy’s major headwinds remain housing, debt, and employment. As incomes have recovered, the economic weakness lies on the spending side.
The paradox is that it is not spending per se – but a complex web of debt unwinding, poor labor environment, relatively negative business regulations / laws, demographics, overbuilt housing sector, and bad luck which have combined for the perfect storm. Monetary policy cannot correct for this, and requires legislative reforms to ease the distress.
Many talking heads are talking about initial unemployment claims improving this week. I consistently use the 4 week seasonally adjusted average to discuss unemployment. The average grew this week because of adjustments to past weeks. The weekly numbers are way to noisy to use them with any certainty. The bottom line is the unemployment situation is NOT improving.
Other data this week
Fed Reserve Chairman Bernanke laid out on Friday where he thought the economy was, and reassured the masses that the economy had slowed down but is still expanding. As I believe there is a limit to the economic stimulus of monetary policy, this stood out:
This list of concerns makes clear that a return to strong and stable economic growth will require appropriate and effective responses from economic policymakers across a wide spectrum, as well as from leaders in the private sector. Central bankers alone cannot solve the world’s economic problems.
The Fed Chairman went on to describe the various options he had if the economy unexpectedly weakened (purchasing more long term securities, slightly lowering the excess bank funds rate to stimulate lending, communicate holding Fed rates lower – and providing more specific time frames, and maybe trigger a little inflation). None of these solutions seemed able to stimulate (just more of the same) as our economic weakness is not caused by the Fed’s monetary policy – in fact the reverse is true. Chairman Bernanke’s conclusion:
……and the economy remains vulnerable to unexpected developments. The Federal Reserve is already supporting the economic recovery by maintaining an extraordinarily accommodative monetary policy, using multiple tools. Should further action prove necessary, policy options are available to provide additional stimulus. Any deployment of these options requires a careful comparison of benefit and cost. However, the Committee will certainly use its tools as needed to maintain price stability–avoiding excessive inflation or further disinflation–and to promote the continuation of the economic recovery.
Advance durable goods data for July 2010 was analyzed and as it is advanced data, detailed analysis is suspect. Many point out that Boeing’s new orders distorted the picture. However, there are always data distortions and I view this data more globally – and this data is not showing evidence of a downturn.
New home sales collapsed in July 2010. New homes sales are lower than any point since government records began. The good news is that inventories are well below pre-recessionary levels.
Major Bankruptcies this Week: AMCORE Financial; RCLC and certain of its wholly-owned subsidiaries – RCPC Liquidating Corp., (f/k/a Ronson Consumer Products Corporation) and Ronson Aviation, Inc; Professional Veterinary Products and its subsidiaries, ProConn and Exact Logistics; Midwest Banc Holdings; Chartwell International; Trico Marine Services
Failed Banks This Week: None