As pretty much everyone is now aware, US Q1 growth was way below expectations. And the only reason it was even marginally positive was because businesses expanded their inventories at a record rate. Here’s a chart from Zero Hedge comparing the economy’s growth with that of inventories:
Thursday, 30 April 2015
[“3 Things” is a weekly publication of ideas, usually contrarian, to provoke thoughtful discussions and decision-making processes. As a portfolio strategist, I am sharing things that I am considering with respect to current investment models and portfolio allocations. Please feel free to email or tweet me with your comments and ideas.]
Just The Weather?
… Wall Street, the IMF, the NBER, (and others) willful blindness. …
While the majority of Wall Street economists had predicted that the first quarters GDP growth rate would be 1% or higher, I have repeatedly suggested that it would be closer to ZERO. … As we know now, the majority of Wall Street economists and analysts were wrong, as usual, as first quarter’s GDP rang in at just 0.2% growth. …
Wall Street (said) “it was weather related.” The problem with the “weather excuse” is that temperatures were only “much below normal” in a relatively few states. … Importantly, three of the most populous states – Texas, Florida, and California had normal to above normal temperatures …
There is mounting evidence that the economy is ACTUALLY slowing and weaker than headline statistics currently suggest. …
Speaking of “data trends,” Michael Lebowitz at 720 Global noted the very important, but receiving little attention, deflator in the most recent GDP release.
At -0.1%, the first quarter of 2015 marked only the third time in over 65 years the GDP Price Deflator has been negative. Additionally concerning, the trend in this indicator since 2000 has been downward sloping.
As noted in the chart above, peaks in the GDP deflator have been either coincident or leading indicators of economic weakness. … The GDP deflator confirms that economic “strength” ended in 2010. Of course, since that time the economy has far underperformed economic expectations from EVERY economist and the Federal Reserve. …
Again, from Mr. Lebowitz:
… The combination of GDP and inflation falling in concert should heighten concerns for investors about the true state of the economy. The data suggests any near-term rebound toward what is historically believed to be trend growth is unlikely. With such disappointment in economic growth comes a challenging investment landscape.”
… In history the largest financial market corrections have been coincident with the onset of recessions. Just something worth remembering since by the time a recession is “recognized,” it will be far too late … .
Imports Tell A Story
… One of the more telling points of the report, as it relates to real economic strength, was the plunge in imports. The reason is two fold:
- The strong dollar makes imports cheaper which should have provided a boost to economic growth, and;
- All those savings from cheap gas should have resulted in higher imports, but they didn’t.
However, the slump in imports was not JUST a Q1 anomaly and is something that I have highlighted previously:
Note that both the annual rate of change in imports and exports have now moved into negative territory. Importantly, notice the extremely sharp decline in imports which suggests that despite lower gasoline prices, the contraction in domestic spending is much sharper than currently realized.
However, as shown, when both imports and exports have contracted to negative levels previously it has been coincident with a recession.
… The story that imports may be telling is of a consumer that has reached the limits of their disposable incomes due to surging healthcare costs and lack of income growth.
(Compare this with the Inventory Growth masquerading as economy that I post on above.)
Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. He is also the host of “Street Talk with Lance Roberts”, Chief Editor of “The X-Factor” Investment Newsletter and the Streettalklive daily blog. Follow Lance on Facebook, Twitter and Linked-In
April 30, 2015
Initial unemployment claims plunged to 262,000 today bettering the Bloomberg Consensus. …
Explaining the Low Numbers
Reader Tim pinged me with this thought on the numbers.
We have talked of “job growth” under Obama and how a large number of part-time jobs were created that have led to people needing more than one part-time job to make ends meet. Of course, this is a two-edged sword. You lose one part-time job, and you cannot file for unemployment because you have another part-time job! … This is another hidden Obamacare impact, and a probable reason for the huge drop in unemployment filing.
Tim refers to the classification of a full time job as 30 hours under Obamacare. In response, many fast food and retail stores slashed worker hours to 25 or less forcing those workers to take on second jobs. This inflates the strength of the job reports and the initial unemployment claims reports as well.
Because of all the multiple part-time jobs people hold, there may not be much of a jump in claims when the recession starts (a jump in claims has typically been regarded as a leading indicator for recession). It’s possible there is no jump at all, just cutbacks in hours.
For discussion of the idea a recession may have already started, please see Real Q1 GDP 0.2% vs. Consensus 1.0%; Disaster in the Details.
Mike “Mish” Shedlock