Macro Digest: US GDP - another bunch of excuses...

It's rare these days that you find any analysis which is worth reading – this however is the exception(The Matthew Kline piece below from the FT).  It's an excellent run down of dynamics of US growth and what did and didn't happen between last year and this year.

 

The conclusion is slightly odd considering the data – especially as the main drag on growth has been:  CAPEX collapse – which is only going to continue weak and a rebound is far away considering the low commodity and energy prices. Buying distressed debt is not equal to more CAPEX in oil/commodity sector – it could be down the line…..

 

Furthermore if ANYONE still want to argue STRONG US dollar is non-issue then read on … and finally, the wrong, very wrong assumption that "saved energy cost" equals more consumption is of course total wrong.. but read on.

 

I also have to apologies to my readers – I was wrong about US GDP – I have claimed it would hit zero QoQ from Q2-into Q4 – I'm so sorry it happened in Q1!!!!!!

 

I also want to point out that in November/December the consensus growth for US was 3.5-4.0% - now less than four month into the year.. .we again have ZERO sign of recovery…. Unless of course you believe in the fake labor market statistics.

 

Furthermore the ONLY data improving in the US is SURVEY data – the kind of "non-hard economic data" where you get on the phone: "Mr. Jakobsen – do you feel better than yesterday? Hmmm, let me see.. its Friday…. I feel EXCELLENT thank you"! – meanwhile the hard data continues to disappoint…. And more important EARNINGS is collapsing. Part of this being a tectonic shift to the "internet of things" – Manufactoring, energy delivery, car service anything with a "commission middleman" will be priced at marginal cost of zero. The US energy producers is the new black in the economy – independent producer who thinks themselves too small to make an impact on the total supply aggregates to such a force that it makes prices collapse 50%.

 

We are reaching the point of the business cycle (or rather the lack of an true business cycle) where the 20% - the QE supported part of the economy (listed companies and banks) is getting dependent on the 80%: The Main Street & SME to come back in their stores to buy goods –Which is not happening. Saving goes before spending even in the US! This GDP Q1 data CLEARY shows you: "Forget about it ".. Consumer are not stupid – the GNI continues to print 2.0-2.25% real growth and has done so since forever.. In other words US GDP is EXCACTLY 2.0% not more not less for now… as everything else in GDP data mean-reverts (except for terms of trade which is always negative- and more so now for the US!) – the terms of trade will ultimately combined with less inventories, and less CAPEX take US GDP close to recession levels.

 

Fed will hike but as a margin call - That remains my call. It will lead to slightly higher US and global yield into end of 2015, before we print ALL-TIME low in yields in early 2016 when US leads us with recession like growth based on weak CAPEX, strong US dollar and an election cycle stopping any progress on infrastructure investment. No reforms = No new growth. World is short of ideas, guts, visions and more of all reforms.

 

Steen

 

 

Another winter of discontent?

Matthew C Klein

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| Apr 29 23:44 | 2 comments | Share

At first glance, America's latest growth figures don't look so good. We generally refrain from commenting on quarterly GDP data because, among other reasons, the numbers are naturally noisy and they're often revised by large amounts. (Or as the Fed says, "transitory factors," although probably not the weather.) Those caveats out of the way, there are a few interesting points in this report that are worth noting.

Let's start with a theoretical exercise. Imagine it were one year ago today, and someone told you that, between then and the end of this past March, the price of oil would fall by about half and that the real, trade-weighted dollar would appreciate by more than 10 per cent. A reasonable person would expect two things: big cutbacks in domestic oil investment that wouldn't initially have been offset by higher investment elsewhere, and a hit to net exports.

None of this would have told you anything about would happen to total spending, but it would have provided guidance on how the composition of spending would change.

The big question would have been how households chose to respond to the massive gains in their purchasing power. After increasing at an anemic annual rate of just 0.5 per cent from the start of 2011 through the end of 2013, personal income per person after taxes, transfers, and inflation has since grown at the robust annual pace of 2.5 per cent:

(This chart and the ones that follow come from the BEA's interactive tables on the national income and product accounts. For reasons that are beyond our ken, links to specific tables break down over time. The chart above was made using data from table 2.1)

One possibility was that people would take advantage of the stronger currency and cheaper oil to boost consumption. That would suggest steady GDP growth, or possibly even an acceleration in total spending. The other option was that households who have been whipsawed by the economic swings of the past few years would wait and see whether the good news reversed, in which case you would have expected stable consumption (excluding energy) and an increase in the savings rate.

Now that we actually have the data, it turns out that combining this theoretical framework with foreknowledge would have led to some pretty solid predictions.

First off, investment spending, excluding inventory accumulation, knocked off about 0.4 per cent from total GDP growth last quarter — the worst performance since the recession ended (all rates are annualised). Had investment spending increased at its average rate since the start of 2011, excluding the first quarter of this year, then GDP growth would have been about 1.5 per cent in the past quarter, rather than 0.2 per cent. (And if my grandmother had wheels she'd be a wagon, but still…)

However, a close look at table 5.3.2 of the NIPAs shows that more than all of that decline can be attributed to the subcategory of "business fixed investment in structures: mining exploration, shafts, and wells". Spending on "other equipment", which includes "mining and oilfield machinery" also fell. These drawdowns shouldn't be a surprise. It's also worth noting that there's a finite amount of capacity that can be cut, especially now that oil prices seem to have stabilised above the breakeven level of many US producers. This drag can't continue for too long even if it persists for a few more quarters.

Meanwhile, private investment outside of the oil and gas industry hummed along nicely. A particularly encouraging sign is the sharp increase in investment in computer software and research and development, which boosted growth more than at any time in the past 60 years after the late 1990s. This sort of spending is more likely to improve productivity and living standards than, say, building a new shopping mall. Housing construction continued to chug along, although the single-family building sector continued to be more volatile than the apartments.

Trade also did what you might have expected given changes in exchange rates and differences in consumption growth across countries. Looking at table 4.2.2, you can see that US imports from abroad have soared while exports to the rest of the world have tanked in the past six months. (For some reason, the boom in imports occurred at the end of 2014 while the collapse in exports didn't happen until the beginning of 2015.) The net contribution to real output growth in the last two quarters was among the worst since the period leading up to the Plaza Accord.

At the end of last year, unusually strong demand for foreign-made computers, appliances, furniture, televisions, industrial metals (oh, and oil) was responsible for almost all of the big uptick in real imports. Plunging demand for American "foods, feeds, and beverages", cars, and "other" capital goods accounted for most of the export decline in the past quarter. Somewhat counterintuitively, the trade balance in "travel services" (tourism, basically) actually improved during this period.

That leaves the big question of what households decided to do with their income gains.

It turns out that Americans split the difference. Going back to table 2.1, about 42 per cent of the total increase in disposable income in the six months ended in March went towards higher savings, rather than additional spending. That prevented consumption from rising as much as some might have expected, and therefore depressed overall GDP growth, but it's a broadly positive phenomenon.

Another way of thinking about this is that 87 per cent of the benefit of lower gasoline prices in the six months ended in March (see table 2.3.5) went towards higher savings, rather than other forms of consumption.

The net effect has been a modest increase in the personal savings rate. It averaged a little over 6 per cent in the mid-1990s, only to steadily fall as America's domestic imbalances worsened. (That went hand-in-hand with the yawning current account deficit.) After the housing bubble burst, the savings rate broadly returned to its mid-1990s level — until the 2013 tax hike deprived workers of income needed to sustain consumption:

Despite the recent uptick, the actual amount of dollars saved last quarter was about 11 per cent smaller than in the beginning of 2012, before accounting for inflation, so it's possible that models based on old relationships might predict more spending out of additional real income gains than we'll end up experiencing.

Even so, it's not as if real personal consumption spending has suffered. In fact, consumption has accelerated thanks to strong underlying income growth, and this looks even more extreme if you exclude food and energy purchases:

So where does this leave the Fed? Some think the weak headline GDP print will cause the central bank to deviate from their supposed plan to begin raising rates in June. We find it hard to see why a report that features healthy real income growth and robust consumption would cause anyone to change their mind about the state of the economy. Stay tuned.

 

 

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Steen Jakobsen  |  Chief Investment Officer

 

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