When it hits 4.5% this quarter it probably will be enough to put Q2 GDP report 3 month from now to 0.5% area. We are one leg in recession already. How long it will take for second leg? Nobody knows...
I found myself wondering if the Dow could get to 13,500 on the strength of this report.
I didn't see any bright spots in this release, which is of course going to be revised substantially over the months to come.
The following troubled me more than the headline number:
"The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE) and state and local government spending..."
I keep long-term data on GDP, and measure it y-o-y instead of the more-volatile (and misleading) quarter-over-quarter.
Real (after inflation) GDP growth in Q1 2007 is +2.06% over Q1 2006.
Nominal (without inflation adjustment) growth is 4.8%.
Nominal minus real equals 2.74%, which represents inflation. (Just FYI, inflation derived from GDP will differ from CPI-U inflation, because they're calculated different ways.)
There's nothing bearish here, all within normal ranges.
Personal consumption mostly came from gas pumps. Credit cards is a magic thing! You just insert a card and pump! Next week insert it again and pump! Who cares?
I found myself wondering if the Dow could get to 13,500 on the strength of this report.
The stock market is overrun with speculation now - it's basically a big casino.
Keep in mind the stock market has to go up or the carry on the margin debt will become negative and a collapse will begin.
Expect hedge funds and big money investors to firehose as much liquidity as they can muster at this thing before it gives out.
For them it's basically free money from "moron long" investors who've begun to pile into the market after seeing day-after-day stockmarket gains on CNBC.
Sebastian, usually economy takes about 3-6 months to swing from the top of stock market euphoria to the first day of recession. Your method of 1 year tracking is good when we are inside trend. We are not. Many things in economy are collapsing of the cliff.
Well that report should just about muzzle all (not Seb of course) voices about housing being "contained", --that there are no "spill-over" effects on the rest of the economy.
Of course, it is still a curiosity that these voices can still make their appearance here in earnest, --that they can make claims that this is "normal" if you only took the average view...why not the most normal of the last 4 decades?
The surprise to me: autos making a minute contribution to GDP.
Breaking down GDP growth into its components makes it easier to see where the strengths and weaknesses in the US economy are right now. It's no surprise that residential investment is the biggest drag on the economy, now down about 17% from one year ago. But growth in other business spending is also slowing down worryingly - non-residential investment has only grown by about 3% over the past year, compared to 6-8% growth from 2004-2006. Even export growth has slowed. The only bright spot in the economy is the consumers keep steadily increasing their spending, by about 3.4% over the past year.
The thing that worries me the most is how personal consumption is now virtually the only thing keeping this economy going. But this may not be sustainable, given continued weak income growth and the end of the real-estate ATM that millions of individuals had used to bolster their consumption in recent years. If consumption growth starts to follow income growth, the US economy could be in for some serious trouble.
Regardless of whether you think inflation is calculated correctly, what Yal was trying to show is not accurate
Yal was saying you are in recession. If inflation is understated ( i have no way of knowing) then you are likely to be in recession just as he says
If peter schiff is correct that a carton of eggs has gone up 30%? in the last year (carton of eggs has outperformed dow) then its not looking good.
It would be interesting to see some home built surveys of groceries and what not.
What seems accepted by mainstream economists who comment on bloomberg etc is that the measure of inflation does understate inflation....i dont think anybody disputes that do they?
GDP growth was lower than expected, and the trend in GDP growth is decelerating. The only thing propping up the economy right now is consumer spending. Corporates have announced a level of share buy backs that preclude a meaning rise in capex in the near-term, and residential construction still has to contract further to reach an equilibrium point, let alone mop up excess inventory. GDP growth looks to be heading sub 1%, whether it actually goes negative or not depends on how employment holds up and whether the finance industry gets an acute case of indigestion from bad lending coming home to roost. My money is on a prolonged period of very weak growth while housing and finance come back to planet earth.
Take a look at ETF traded fund,symbol TLT, lehman's 20 yr treasury. This will be a good proxy for the treasury. Longs might see a 10% return over the next couple of quarters!
Even as many lenders grow more cautious, Fannie Mae and Freddie Mac have been rapidly increasing their purchases of one type of loan under close scrutiny from regulators. (Does this mean the regulators are closely scrutinizing these purchases and granting their tacit approval?) Inside Alternative Mortgages, a trade publication, reported that the two GSEs issued $58.35b of securities backed by I/O mortgages in the first quarter, up 43% from a year earlier.
I/O mortgages allow borrowers to pay only the interest due during an initial period. That exposes them to the potential for a jump in payments once they must start paying down the principal. It also slows their accumulation of equity, increasing the risks of foreclosures.
A spokesman for Fannie said the companys purchases of such loans are targeted toward high credit-quality borrowers. A Freddie spokesman said the company monitors the loans carefully. We think we have a very good handle on credit quality, he added.
The thing about inflation is that basic needs inflation is taking a sudden sharp upward run. I've never seen anything like it.
Ordinarily I would not be too worried, but the combination of high debt loads on the portions of the population with a higher proportion of disposable personal income and acute pressure on the segments of the population that spend relatively high proportions of their income on basic needs is worrisome.
The stock market increases have a much narrower effect on consumers than housing increases, so overall it looks like constraints on spending will keep rising. The relatively high proportion of ARMs out there due to reset in this environment is also worrisome. Prime ARMs will reset only a few hundred dollars higher, but the combination of those adjustments combined with higher basic needs prices is going to have an unexpected negative impact on consumer spending beginning this summer if the stats are right.
Anemic, lethargic, sluggish, take your pick of adjectives to describe the growth of the U.S. economy in the first quarter. The consensus expectation going into the report was for growth of 1.8% and we came in at 1.3%. I had been expecting a weaker than consensus figure, but this was even weaker than I expected. In the fourth quarter we grew at 2.5%. If this number holds up after the next two rounds of revisions it will be the weakest period of growth since the last recession. In the last six quarters we have had only one which exceeded 3.0% (which is generally seen as the potential growth rate of the economy) and that was due to the bounce back from the hurricanes. Digging deeper into the numbers it is clear that housing continues to be a problem with Residential Investment falling 17.0%, although that is not as rapid a decline as the 19.8% fall in the fourth quarter. For the rest of the year I expect that housing will continue to be a drag on the economy but the rate of decline may continue to slow.
The consumer held up pretty well with real personal consumption expenditures rising 3.8% although that was down from the 4.2% rise in the 4th quarter. Within the consumer sector, spending on durable goods was very strong, up 7.3% vs. a rise of 4.4% in the fourth quarter, while spending on non-durable goods saw growth fall to 2.9% from 5.9% in the fourth quarter.
Spending by businesses improved from the very weak showing in the fourth quarter, rising 2.0% vs. a decline of 3.1% in the fourth quarter. Not exactly robust, but not imploding either. Both components of business spending put in better performances, with non-residential building rising at a 2.2% annual rate int eh first quarter vs. a 0.8% rise in the fourth quarter, and spending on equipment and software rising 1.9% vs. a decline of 4.8% in the fourth quarter. Lower inventory investment also was a drag on economic growth but not as much of a drag as it was in the fourth quarter.
Government spending was a major contributor to the weak economic growth growing only 0.9% vs. a 3.4% rise in the 4th quarter. Federal spending was down 3.0% vs. a 4.6% rise last quarter. In the fourth quarter defense spending ballooned 12.3% while non defense spending fell sharply by 9.6%. That pattern was reversed in the first quarter with defense spending falling 6.6% while non-defense spending rose 4.7%. Meanwhile state and local spending rose 3.3% in the first quarter versus 2.7% in the fourth quarter.
Net imports were a significant drag on economic growth which is a bit of a surprise given the gradual improvement in the trade picture we have seen in other measures. Exports fell 1.2% after surging 10.6% in the fourth quarter, while imports rose 2.3% after falling 2.6% in the fourth quarter. If the overall GDP number does get revised upward next month, I would think that the net export picture will be a major factor.
Overall this report shows that the economy has a cold, not cancer (it may also have cancer in the form of exploding health care costs etc, but that is a much longer term issue that does not really show up in this report, and it is still a treatable form of cancer but I digress). The overall growth number may be revised somewhat higher next month, but not enough to change the picture of a very sluggish, but not recessionary, economic environment. Fortunately growth elsewhere in the world is about the best it has ever been, and the S&P 500 firms derive a large portion of their earnings from abroad. With relative growth much higher abroad, I would expect the dollar to continue to weaken. Look to invest in U.S. firms with large overseas operations or in overseas markets directly.
Dirk,
Only a few read "the final" as the final: In the fourth quarter we grew at 2.5%. If this number holds up after the next two rounds of revisions it will be the weakest period of growth since the last recession.
And only even fewer consider the prospect of adjusting q4's 2.5 stat to, say, 2.0 to make the "advance" a more palatable 1.8 as predicted.
This partially explains the stock market: Fortunately growth elsewhere in the world is about the best it has ever been, and the S&P 500 firms derive a large portion of their earnings from abroad.
but not the domestic economy and the domestic plants and the domestic workers who have a decreasing share in that growing global economy.
"Good for Consumer Confidence"
'Not to late for Fred Thompson to enter the GOP race. Here's a photo of Fred & the prospective First Lady. 404 Not Found
Calmo,
I fully agree with your point about domestic workers etc, but my audience at Zacks is interested in the investment implications more than the macro economic implications, and certianly the social implications.
Worried,
Yeah I thought net exports were going to be helpful to growth, (less negative than they have been in the recent past). I was very surprised by that part of the report, and suspect that there may be a revision there, either that or the other trade numbers will have to be revised downward.
Skytrecker,
Yes the health care problems are coming up and we need to do surgery soon, but doubt that they will really hit and cause significant problems in calandar year 2007. For my money the best surgical option would be a HMOectomy by going to a single payer system, but that is a topic for another day, and perhaps another blog, perhaps over at Angry Bear or Economists View.
Dotty, I must say, that after reading Yellen (who I can stomach you know?), I did have the same thoughts about the lipstick...and wondering if it was being applied rather thickly, rather out-of-controlly ...a tired mind maybe, not the desperate one clutching at damn near anything.
Much better to say less...like Bernanke.
U.S. 1Q rental vacancy rate rises to 10.1%
U.S. 1Q homeowner vacancy rate rises to record 2.8% vs. 2.7%
When it hits 4.5% this quarter it probably will be enough to put Q2 GDP report 3 month from now to 0.5% area. We are one leg in recession already. How long it will take for second leg? Nobody knows...
I found myself wondering if the Dow could get to 13,500 on the strength of this report.
I didn't see any bright spots in this release, which is of course going to be revised substantially over the months to come.
The following troubled me more than the headline number:
"The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE) and state and local government spending..."
That is hard to overcome with rosy glasses.
I keep long-term data on GDP, and measure it y-o-y instead of the more-volatile (and misleading) quarter-over-quarter.
Real (after inflation) GDP growth in Q1 2007 is +2.06% over Q1 2006.
Nominal (without inflation adjustment) growth is 4.8%.
Nominal minus real equals 2.74%, which represents inflation. (Just FYI, inflation derived from GDP will differ from CPI-U inflation, because they're calculated different ways.)
There's nothing bearish here, all within normal ranges.
Sebastia
Personal consumption mostly came from gas pumps. Credit cards is a magic thing! You just insert a card and pump! Next week insert it again and pump! Who cares?
I found myself wondering if the Dow could get to 13,500 on the strength of this report.
The stock market is overrun with speculation now - it's basically a big casino.
Keep in mind the stock market has to go up or the carry on the margin debt will become negative and a collapse will begin.
Expect hedge funds and big money investors to firehose as much liquidity as they can muster at this thing before it gives out.
For them it's basically free money from "moron long" investors who've begun to pile into the market after seeing day-after-day stockmarket gains on CNBC.
Sebastian, usually economy takes about 3-6 months to swing from the top of stock market euphoria to the first day of recession. Your method of 1 year tracking is good when we are inside trend. We are not. Many things in economy are collapsing of the cliff.
Well that report should just about muzzle all (not Seb of course) voices about housing being "contained", --that there are no "spill-over" effects on the rest of the economy.
Of course, it is still a curiosity that these voices can still make their appearance here in earnest, --that they can make claims that this is "normal" if you only took the average view...why not the most normal of the last 4 decades?
The surprise to me: autos making a minute contribution to GDP.
GDP - Price deflator
Q4 2006: 2.5%-1.7% = + 1.2%
Q1 2007: 1.3%-4.0% = - 2.7%
I would say we are already IN recession.
This is before all the down revisions in GDP kicks in.
"bottom in the 3.5% to 4.0% range." - at this rate of decline bottom is at 2010 !
I think the decline rate will accelarate.
Yal,
1.3% is real GDP.
If inflation is accurately measured.
Sebastian take a read from Kash this AM.
The Street Light
Breaking down GDP growth into its components makes it easier to see where the strengths and weaknesses in the US economy are right now. It's no surprise that residential investment is the biggest drag on the economy, now down about 17% from one year ago. But growth in other business spending is also slowing down worryingly - non-residential investment has only grown by about 3% over the past year, compared to 6-8% growth from 2004-2006. Even export growth has slowed. The only bright spot in the economy is the consumers keep steadily increasing their spending, by about 3.4% over the past year.
The thing that worries me the most is how personal consumption is now virtually the only thing keeping this economy going. But this may not be sustainable, given continued weak income growth and the end of the real-estate ATM that millions of individuals had used to bolster their consumption in recent years. If consumption growth starts to follow income growth, the US economy could be in for some serious trouble.
"RI could fall into the 2's"
There's no reason to believe RI will find support at the old lows as it did not recognize resistance in the upper 5's.
CR, don't you think the official data has underestimated RI in 2004-2006 because of too many undocumented workers in this cycle?
Regardless of whether you think inflation is calculated correctly, what Yal was trying to show is not accurate.
Think about it, we need the war in Iraq to keep the economy from tumbling into recession.
Banker - they are finally starting to catch up:
FT.com / UK - Banks getting fatter when they should be slimmer beasts
Up to our eyes in debt we can't see - Telegraph
U.K. Home Prices Are `Very Inflated,' Tchenguiz Says (Update1) - Bloomberg.com
Neal is right and an expansion into Iran looks like it is just waiting for this defense spending opportunity.
RI will fall below 2.5% by this winter.
BECAUSE
1 Take a look at the Dollar Index today, it has been as low as 81.19. When the dollar falls below 80.00 , who or what will save it.
2 Gasoline will hit $4.00 dollars a galion this summer.
3 The credit ratings of over half the major home builders will be downgraded later this year.
4 Foreclosures will soon be the comp for many sellers.
5 The wave of resets will soon explode.
6 Over 63 lenders have gone out of bussiness since 12-06-07.
7 Ira
Yal was saying you are in recession. If inflation is understated ( i have no way of knowing) then you are likely to be in recession just as he says
If peter schiff is correct that a carton of eggs has gone up 30%? in the last year (carton of eggs has outperformed dow) then its not looking good.
It would be interesting to see some home built surveys of groceries and what not.
What seems accepted by mainstream economists who comment on bloomberg etc is that the measure of inflation does understate inflation....i dont think anybody disputes that do they?
GDP growth was lower than expected, and the trend in GDP growth is decelerating. The only thing propping up the economy right now is consumer spending. Corporates have announced a level of share buy backs that preclude a meaning rise in capex in the near-term, and residential construction still has to contract further to reach an equilibrium point, let alone mop up excess inventory. GDP growth looks to be heading sub 1%, whether it actually goes negative or not depends on how employment holds up and whether the finance industry gets an acute case of indigestion from bad lending coming home to roost. My money is on a prolonged period of very weak growth while housing and finance come back to planet earth.
There is no doubt that the economy is slowing. Everyone here agrees on that I believe. Is there any reason to believe that we are at the bottom?
Steve,
OK I did not know that.
"..Corporates have announced a level of share buy backs that preclude a meaning rise in capex in the near-term.."
They can just do as CFC and get a loan to buyback shares ....
Take a look at ETF traded fund,symbol TLT, lehman's 20 yr treasury. This will be a good proxy for the treasury. Longs might see a 10% return over the next couple of quarters!
Even as many lenders grow more cautious, Fannie Mae and Freddie Mac have been rapidly increasing their purchases of one type of loan under close scrutiny from regulators. (Does this mean the regulators are closely scrutinizing these purchases and granting their tacit approval?) Inside Alternative Mortgages, a trade publication, reported that the two GSEs issued $58.35b of securities backed by I/O mortgages in the first quarter, up 43% from a year earlier.
I/O mortgages allow borrowers to pay only the interest due during an initial period. That exposes them to the potential for a jump in payments once they must start paying down the principal. It also slows their accumulation of equity, increasing the risks of foreclosures.
A spokesman for Fannie said the companys purchases of such loans are targeted toward high credit-quality borrowers. A Freddie spokesman said the company monitors the loans carefully. We think we have a very good handle on credit quality, he added.
No worries, yal. I didn't think you were trying to sneak one past us or anything like that.
The thing about inflation is that basic needs inflation is taking a sudden sharp upward run. I've never seen anything like it.
Ordinarily I would not be too worried, but the combination of high debt loads on the portions of the population with a higher proportion of disposable personal income and acute pressure on the segments of the population that spend relatively high proportions of their income on basic needs is worrisome.
The stock market increases have a much narrower effect on consumers than housing increases, so overall it looks like constraints on spending will keep rising. The relatively high proportion of ARMs out there due to reset in this environment is also worrisome. Prime ARMs will reset only a few hundred dollars higher, but the combination of those adjustments combined with higher basic needs prices is going to have an unexpected negative impact on consumer spending beginning this summer if the stats are right.
Cross Post from Zacks.com
Anemic, lethargic, sluggish, take your pick of adjectives to describe the growth of the U.S. economy in the first quarter. The consensus expectation going into the report was for growth of 1.8% and we came in at 1.3%. I had been expecting a weaker than consensus figure, but this was even weaker than I expected. In the fourth quarter we grew at 2.5%. If this number holds up after the next two rounds of revisions it will be the weakest period of growth since the last recession. In the last six quarters we have had only one which exceeded 3.0% (which is generally seen as the potential growth rate of the economy) and that was due to the bounce back from the hurricanes. Digging deeper into the numbers it is clear that housing continues to be a problem with Residential Investment falling 17.0%, although that is not as rapid a decline as the 19.8% fall in the fourth quarter. For the rest of the year I expect that housing will continue to be a drag on the economy but the rate of decline may continue to slow.
The consumer held up pretty well with real personal consumption expenditures rising 3.8% although that was down from the 4.2% rise in the 4th quarter. Within the consumer sector, spending on durable goods was very strong, up 7.3% vs. a rise of 4.4% in the fourth quarter, while spending on non-durable goods saw growth fall to 2.9% from 5.9% in the fourth quarter.
Spending by businesses improved from the very weak showing in the fourth quarter, rising 2.0% vs. a decline of 3.1% in the fourth quarter. Not exactly robust, but not imploding either. Both components of business spending put in better performances, with non-residential building rising at a 2.2% annual rate int eh first quarter vs. a 0.8% rise in the fourth quarter, and spending on equipment and software rising 1.9% vs. a decline of 4.8% in the fourth quarter. Lower inventory investment also was a drag on economic growth but not as much of a drag as it was in the fourth quarter.
Government spending was a major contributor to the weak economic growth growing only 0.9% vs. a 3.4% rise in the 4th quarter. Federal spending was down 3.0% vs. a 4.6% rise last quarter. In the fourth quarter defense spending ballooned 12.3% while non defense spending fell sharply by 9.6%. That pattern was reversed in the first quarter with defense spending falling 6.6% while non-defense spending rose 4.7%. Meanwhile state and local spending rose 3.3% in the first quarter versus 2.7% in the fourth quarter.
Net imports were a significant drag on economic growth which is a bit of a surprise given the gradual improvement in the trade picture we have seen in other measures. Exports fell 1.2% after surging 10.6% in the fourth quarter, while imports rose 2.3% after falling 2.6% in the fourth quarter. If the overall GDP number does get revised upward next month, I would think that the net export picture will be a major factor.
This repo
Overall this report shows that the economy has a cold, not cancer (it may also have cancer in the form of exploding health care costs etc, but that is a much longer term issue that does not really show up in this report, and it is still a treatable form of cancer but I digress). The overall growth number may be revised somewhat higher next month, but not enough to change the picture of a very sluggish, but not recessionary, economic environment. Fortunately growth elsewhere in the world is about the best it has ever been, and the S&P 500 firms derive a large portion of their earnings from abroad. With relative growth much higher abroad, I would expect the dollar to continue to weaken. Look to invest in U.S. firms with large overseas operations or in overseas markets directly.
Ugh,
And more ugh. The export numbers really surprised me. Hmmmm...
Dirk,
Only a few read "the final" as the final:
In the fourth quarter we grew at 2.5%. If this number holds up after the next two rounds of revisions it will be the weakest period of growth since the last recession.
And only even fewer consider the prospect of adjusting q4's 2.5 stat to, say, 2.0 to make the "advance" a more palatable 1.8 as predicted.
This partially explains the stock market:
Fortunately growth elsewhere in the world is about the best it has ever been, and the S&P 500 firms derive a large portion of their earnings from abroad.
but not the domestic economy and the domestic plants and the domestic workers who have a decreasing share in that growing global economy.
"The export numbers really surprised me. Hmmmm..."
I thought that booming exports was the good news story of the last few months?
"Good for Consumer Confidence"
'Not to late for Fred Thompson to enter the GOP race. Here's a photo of Fred & the prospective First Lady.
404 Not Found
The health care problem is more near then you can imagine- that is the cancer.
Calmo,
I fully agree with your point about domestic workers etc, but my audience at Zacks is interested in the investment implications more than the macro economic implications, and certianly the social implications.
Worried,
Yeah I thought net exports were going to be helpful to growth, (less negative than they have been in the recent past). I was very surprised by that part of the report, and suspect that there may be a revision there, either that or the other trade numbers will have to be revised downward.
Skytrecker,
Yes the health care problems are coming up and we need to do surgery soon, but doubt that they will really hit and cause significant problems in calandar year 2007. For my money the best surgical option would be a HMOectomy by going to a single payer system, but that is a topic for another day, and perhaps another blog, perhaps over at Angry Bear or Economists View.
Worried,
If I had to guess, we'll get an upward revision on exports, but heck, maybe the OTHER data was misleading.
ac,
You have a link for those rental vacancy numbers?
Looks to me that even this BS government is running out of lipstick.
Why, I'll be damned, that is a pig.
Dotty, I must say, that after reading Yellen (who I can stomach you know?), I did have the same thoughts about the lipstick...and wondering if it was being applied rather thickly, rather out-of-controlly ...a tired mind maybe, not the desperate one clutching at damn near anything.
Much better to say less...like Bernanke.
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