The same dynamics are present in the CRE market as were in the house market in 2005/2006. Lock-up in credit market may cause problems, withdrawals from REITs may cause more. Lots of action still in non-residential construction, but there are no guantees as to whether the same dynamics will exist in 2 months.
btw, I have stopped listenning to him after I found out he describe himself as "passive investor" and said he is 100% in stocks. People should really put their money where their mouth is at least in part.
The guy is very experienced, not in the least scared of anything, a cool hand.
Here is a quote from him:
There is an old Wall Street saying: the market can remain irrational longer than you can remain solvent. You see a bond trading at LIBOR +50 that should be LIBOR +25. Irrational! you say. But when there is no liquidity, you can wake up tomorrow and its LIBOR +75. Then next week its LIBOR +200. Irrational still perhaps, but you are out of a job anyway.
"The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis" - Herbert Hoover, October 25, 1929.
Briefing.com show the 2Q GDP chain deflator at 2.7% compared to consensus of 3.4% and 1Q deflator of 4.2%. Now, wasn't it 2nd quarter when the large run up in crude and agflation occurred? Is there really that much download (deflationary) pressure in the GDP to push down food/energy/all other costs to 2.7%?
I'm betting the Preliminary is lower and the Final is lower yet - following the trend of (most of) the last few years worth of Advance to Final releases.
I'm also going to point out this gem from deep in the footnotes:
The annual revision also incorporated the following refinement to estimating methodologies:
The price index used for deflating business purchases of new light trucks reflects a new
treatment of special financing incentives (such as ?zero-percent? financing) that is more consistent with
the price index used for deflating personal consumption expenditures for new light trucks. In the revised
estimates, these financing incentives are treated consistently as a financial transaction rather than as a
reduction in the prices used for deflating business truck purchases. Previously, the price index used for
deflating business truck purchases -- a producer price index (PPI) -- treated special financing incentives
as a price reduction; in the revised estimates, the consumer price index (CPI) for light trucks, which does
not treat these incentives as a price reduction, is used for deflation. For inventory investment, beginning
with the first quarter of 2007, a special PPI that excludes special financing incentives is used for
deflation; for 2004-2006, a CPI that excludes special financing is used in the revised estimates.
No suprise that the Q2 GDP was strong. Businesses went on a huge borrowing and spending binge.
The question is what happens when both businesses and consumers have to start paying off their loans and the easy credit isn't there to borrow for the payments.
Note the downward revisions over the past year. We were looking at a first Q y/y growth of 1.9%. Now it is only 1.5%,
and even with the 2nd Q pop the year over year change is now 1.8% or less than we thought it was a quarter ago.
OT - From Prof. Hamilton's blog entry on new housing report, "Looks like it might be a good time to bring the fed funds target back to 5%"
From Barry's post with WSJ pic of DOW - "Futures markets price in 100% odds of a cut in the Federal Funds rate to 5% by December."
If these are related, I have to wonder how a single 25bp rate cut by year end could alleviate the free fall in sales we'll see throughout this year when a 100bp cut might get things moving now. The Fed and the prof. observers it seems are always too late to the rescue.
btw, I have stopped listenning to him after I found out he describe himself as "passive investor" and said he is 100% in stocks. People should really put their money where their mouth is at least in part.
I'm not impressed with Roubini. He strikes me as a genuine permabear who revels in bad things.
He keeps trying to nail down the beginning of a recession to the quarter, but I think economies are to complex and chaotic to make such precise predictions. It seems naieve to me.
As far as economists go I'm a fan of Kasriel and Rosenberg. And that CR guy. If he's not an economist he should get an honorary PhD in the subject.
ac and yal, I used to read roubini alot as well, but barely even skim his site every few weeks. I got tired of him calling for 1% gdp quarter after quarter and then looking at all the doom and gloom data when it showed up as 3.5%
Right now I am only on CR and BigPicture, any other good ones out there?
whatever GDP number comes out today, it will be in part the beneficiary of Food and Energy inflation, which does not get properly accounted for in the GDP price deflator
If it is true ¿shouldn't have it been true for several quarters?
"Investment in non-residential structures increased at a 22% annualized rate!"
I would imagine a lot of this increase is from deals done hastily in anticipation of a credit crunch and/or rate increase. Has anyone heard of big RE financing deals failing?
From an AP story:
"The Commerce Department reported that the U.S. economy was strong during the second quarter as the drag from the housing sector lessened."
Mish was great a year or two back when the housing mess really started rolling. The Mike Morgan reports were some excellent "on the ground" reporting to give you a feel for what was going on.
These days, however, I find that he just lags CR with similar stuff. Still, I haven't taken him out of my RSS reader yet.
"Net exports of goods and services contributed 1.18%"
If this becomes a larger and larger component of growth I might think a little less bearishly.
"Investment in non-residential structures increased at a 22% annualized rate!"
This I view is bad unless it is productive infrastructure.
I have to admit I think a tough recession is unavoidable. I can't get over the debt load numbers. My personal anecdotal evidence just keeps on piling up: a cop friend who breaks down crying when revealing his wife surprised him with a hidden additional $50,000 in credit card debt, another friend whose lawn care guy read "rich dad poor dad" and heloced his house and bought two investment properties, a lawyer who didn't understand her home loan, students at the university I work at that I talk to usually have $5-10 thousand in CC debt....
Actually, I have to admit I find myself wishing for a recession to rid us of some affluenza and to spur a streamlining of our infrastructure. I think we need a good kick to the head for that to happen.
Falling prices on subprime mortgage bonds have cut the value of such securities held by Fannie Mae and Freddie Mac by $4.7 billion, Citigroup Inc. analysts estimate.
Even so, says a Citigroup report released Thursday, those paper losses won't necessarily be realized because prices may recover, and the two giant companies "can easily ride out" turmoil in the market for subprime mortgages, those for people with weak credit records.
I traded through the Russia/LTCM mess and it was ugly...very ugly. We're not even close to that stage but I still think people are valuing stocks based on historic margin continuing and defaults staying at record levels. This could happen but are stocks cheap? before you answer that, remember that a chunk of the EPS growth in the S&P/Dow has come from financials and buybacks. I prefer to buy stocks when they're cheap and I'm willing to sit in cash until that happens.
In my area the builders accelerated building the last two months.
So although nothing is selling, there are no job losses and they are still buying supplies etc.
They can't stop in the middle of half-built master-planned communites, as they have HOA and Mello Roos issues, the cities are leaning on them with expiring permits etc.
It was like a car realizing the light was yellow to late to stop. They could either slam on the brakes or hit the gas.
"I think we need a good kick to the head for that to happen."
A recession might be a good thing collectively in the long run, but in the short run the pain tends to be heaped upon various individuals, usually those least deserving. Bush, Greenspan, Mozillo, and the rest of our overlords will come through fine - absolutely poorer but relatively richer.
I wouldn't hold Roubini's passive investor status against him. I think he probably does this for two reasons: 1) to avoid short-term financial conflicts of interest with his economic analysis; 2) given his very secure career status he can afford to do this. I do think Roubini's objectivity takes a hit in that he tends to selectively focus on data that supports his position, but he does bring up some very good points.
"Bush, Greenspan, Mozillo, and the rest of our overlords will come through fine - absolutely poorer but relatively richer."
Yes true, but they will eventually die like everyone else.
"A recession might be a good thing collectively in the long run, but in the short run the pain tends to be heaped upon various individuals, usually those least deserving."
I think it is time to think for the good collectively in the long run. This quarter-based financial structure has stunted our forward thinking.
It will be interesting to see the detail on personal consumption expenditures on Monday.
'Housing services' are 10% of GDP. Per today's release, services (housing, medical, etc.) grew 2.2%. We'll see what the growth in housing services is on Monday, but is it plausible to think that the real value of housing services could be going up? We have all-time highs in vacancies and Case-Shiller and OFHEO point to flat prices.
It's not as good as it looks, but Q1 wasn't as bad as it looked, either. If you measure the quarters' growth year-over-year, Q1 2007 was +1.55% and Q2 was up 1.78%.
IOW, a mid-cycle slowdown. When this happened in the mid-90's the Fed eased a little bit and things picked-up again. I expect that to happen again.
I'm a little skeptical also, especially about the strength of (net) exports. We probably spent a lot more importing crude oil in the 2nd quarter, but this price increase is eliminated in considering real GDP...
"This quarter-based financial structure has stunted our forward thinking."
Quarterly financial reports are hardly the core of the problem. How they are (mis-)used is a symptom of a larger problem - a winner take-all culture that values nothing other than wealth. Why should any CEO worry about building a business for the long-term when some financial gimickry will yield wealth much sooner? Honesty and self-respect are just sops for the rank-and-file employees that are about to get laid off to help the CEO's stock options.
"Bankruptcy will be the only thing that stops the builders."
Some truth to that! The homebuilding industry (loose term) has such an odd combo of big nationals (too many) and local guys. I know lots of smaller local guys who only build what they have pre-sold, ever. Others who spec and have survived have a very good feel for the local community in which they build - they don't buy land too far ahead and they sense the slowdowns/speedups locally.
The nationals are tone-deaf to that stuff. Their strength is big pre-planned heavily-market communities and they go boom/bust all the time.
We all tend to think our own way is best. You, I presume, are an "active investor". It is, however, an odd decision to judge Roubini's economic forecasting according to his investment style. He has a forecasting record. Why not judge him on that?
here is a cross post of what I put up on the zacks blog
This morning the Commerce department announced that GDP grew 3.4% in the second quarter, up from 0.6% (revised from 0.7%) in the firs quarter. This was a better than consensus number which was looking for 3.2%. However, looking at the numbers closely, there appears to be less than meets the eye. I dont want to over stress the weakness of the internals, since this was clearly a better report than in the first quarter, but people might want to hold off on popping the champagne. Growth was driven mostly by increased government spending, particularly for defense, a better trade picture, and a boom in non-residential building. The consumer slowed down very sharply. The overall price deflator rose by 3.9% in the second quarter, up from 3.8% in the first quarter, but if you strip out food and energy (who actually consumes those items) prices rose just 1.7% in the second quarter vs. 3.1% in the first quarter. Just as a reminder, GDP is Consumer Spending + Investment + Government Spending + Exports Imports.
Looking at the important components of GDP we see that consumer spending (Personal Consumption Expenditures or PCE) rose just 1.7% in the quarter vs. a rise of 3.7% in the first quarter. The slowdown in consumer spending was across the board, but was particularly sharp for durable goods, which rose just 1.6% vs. a rise of 8.8% in the first quarter. Non-durables grew at 0.8% vs. 3.0% and services at 2.2% vs. 3.1%. So much for the idea that the real estate slowdown is not affecting the consumer!
On the Investment side, things were looking up a bit, particularly Non-Residential Investment which rose 8.1% vs. a rise of just 2.1% in the first quarter. The strength was concentrated in the non-residential building component which soared 22.1% vs. an increase of just 6.4% in the first quarter. Investment in equipment and software also picked up but not nearly as dramatically rising 2.3% vs. an increase of just 0.3% in the first quarter. Residential investment, to no ones surprise was down, but the decline was only 9.3% vs. a decline of 16.3% in the first quarter. Thus housing is still declining, but at a somewhat slower rate. However, residential investment was still 4.88% of GDP in the quarter. Since 1960, it has averaged 4.63% of GDP. After the unprecedented boom in housing we had from 2000 to 2005, it would be logical to assume that the number would fall well below the average when all is said and done. The decline in housing still has a long way to go.
Federal spending rose 6.7% vs. a 6.3% decline in the first quarter, that is a huge swing. Most of the swing was in defense spending which was up 9.5% after declining 10.8% in the first quarter (the timing of when major weapons systems are bought can cause this to fluctuate significantly from quarter to quarter). Non-defense federal spending rose just 1.3% after a 3.8% rise in the first quarter. State and local spending growth was essentially unchanged rising 2.9% in the second quarter vs. a 3.0% rise in the first quarter.
We are finally starting to see the benefits of over a 25% decline in the value of the dollar since 2000. Exports rose 6.4% in the second quarter vs. only a 1.1% rise in the first quarter. Meanwhile imports fell 2.6% vs. a rise of 3.9% in the first quarter. This was very impressive given that the price of oil was up sharply in the second quarter and we were importing a much larger than normal percentage of our gasoline (as opposed to just crude oil) supplies. While the figures were not broken out, it implies that non energy imports were down sharply. That however does seem to fit with a consumer which is slowing down, so there is a dark cloud to go with that silver lining.
The change in private inventories added 0.15% to the GDP growth number after subtracting 0.65% in the first quarter. Growing inventories in the face of slowing consumer demand is not exactly something that inspires a lot of faith in the growth going forward. However, all in all, not a bad report, and clearly the economy did rebound nicely from its first quarter slump.
In addition to the numbers for the second quarter, the same release contained a number of revisions to prior year data. We find out now that growth in each of the last three years was notably slower than we were lead to believe when the numbers were released originally. Growth for 2004 was revised down to 3.6% from 3.9%, growth from 2005 was revised down to 3.1% from 3.2% and growth for 2006 turns out to be 2.9% vs. the previously reported 3.3%. I would not be surprised to see the second quarter numbers reported today revised down as well, both in the releases that come out in the next two months and then much later. However, the revisions coming in the next two months (they are normal scheduled revisions as new data comes in, Im not implying any sort of conspiracy here or anything) are unlikely to be big enough to change the overall impression that this was a much better quarter than the first quarter.
It's not as good as it looks, but Q1 wasn't as bad as it looked, either. If you measure the quarters' growth year-over-year, Q1 2007 was +1.55% and Q2 was up 1.78%.
Sebastian
You say this like it's a good thing?
When PCE avg. ending Q1 is 3.2, PDI is -6.45, the CPI is up 2.7 in the same window?
When everybody was saying Q2 was going to be awful Richard Berner at Morgan Stanley was saying 4% (I posted that) looks like he was closer than most. He is usually pretty good.
When PCE avg. ending Q1 is 3.2, PDI is -6.45, the CPI is up 2.7 in the same window?
Can you be that shameless?"
Excuse me? You mean, like CR forecasting that 400k-600k residential construction workers are going to lose their jobs by this Summer (now), with the embarrassingly lame argument that the data is wrong and not his assumptions? Shameless like that, you mean?
No, I wasn't saying it with any particular intent. It's just a lower level of growth that isn't steadily deteriorating into a recession. Like has happened many, many times before.
Residential investmenmt has been negative since Q1 2006(-.05,-.76,-1.33,-.1.04,-.93,-.49 ) and you still don't believe that those job losses are there after seeing the BED numbers.
The same dynamics are present in the CRE market as were in the house market in 2005/2006. Lock-up in credit market may cause problems, withdrawals from REITs may cause more. Lots of action still in non-residential construction, but there are no guantees as to whether the same dynamics will exist in 2 months.
I wonder what Roubini has to say about that.....
btw, I have stopped listenning to him after I found out he describe himself as "passive investor" and said he is 100% in stocks. People should really put their money where their mouth is at least in part.
It is always, I repeat always, valuable to pay a visit to:
Accrued Interest
The guy is very experienced, not in the least scared of anything, a cool hand.
Here is a quote from him:
There is an old Wall Street saying: the market can remain irrational longer than you can remain solvent. You see a bond trading at LIBOR +50 that should be LIBOR +25. Irrational! you say. But when there is no liquidity, you can wake up tomorrow and its LIBOR +75. Then next week its LIBOR +200. Irrational still perhaps, but you are out of a job anyway.
He says he doesn't like what he sees.
Less chance of a rate cut by December, I'd say.
"The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis" - Herbert Hoover, October 25, 1929.
Briefing.com show the 2Q GDP chain deflator at 2.7% compared to consensus of 3.4% and 1Q deflator of 4.2%. Now, wasn't it 2nd quarter when the large run up in crude and agflation occurred? Is there really that much download (deflationary) pressure in the GDP to push down food/energy/all other costs to 2.7%?
Wonderful post by accrued interest that is apropos:
Accrued Interest: Dow Falls 666 Points on Fire, Brimstone
I'm betting the Preliminary is lower and the Final is lower yet - following the trend of (most of) the last few years worth of Advance to Final releases.
I'm also going to point out this gem from deep in the footnotes:
That might have had an impact, I bet.
Kirk
No suprise that the Q2 GDP was strong. Businesses went on a huge borrowing and spending binge.
The question is what happens when both businesses and consumers have to start paying off their loans and the easy credit isn't there to borrow for the payments.
Note the downward revisions over the past year. We were looking at a first Q y/y growth of 1.9%. Now it is only 1.5%,
and even with the 2nd Q pop the year over year change is now 1.8% or less than we thought it was a quarter ago.
OT - From Prof. Hamilton's blog entry on new housing report, "Looks like it might be a good time to bring the fed funds target back to 5%"
From Barry's post with WSJ pic of DOW - "Futures markets price in 100% odds of a cut in the Federal Funds rate to 5% by December."
If these are related, I have to wonder how a single 25bp rate cut by year end could alleviate the free fall in sales we'll see throughout this year when a 100bp cut might get things moving now. The Fed and the prof. observers it seems are always too late to the rescue.
I wonder what Roubini has to say about that.....
btw, I have stopped listenning to him after I found out he describe himself as "passive investor" and said he is 100% in stocks. People should really put their money where their mouth is at least in part.
I'm not impressed with Roubini. He strikes me as a genuine permabear who revels in bad things.
He keeps trying to nail down the beginning of a recession to the quarter, but I think economies are to complex and chaotic to make such precise predictions. It seems naieve to me.
As far as economists go I'm a fan of Kasriel and Rosenberg. And that CR guy. If he's not an economist he should get an honorary PhD in the subject.
ac and yal, I used to read roubini alot as well, but barely even skim his site every few weeks. I got tired of him calling for 1% gdp quarter after quarter and then looking at all the doom and gloom data when it showed up as 3.5%
Right now I am only on CR and BigPicture, any other good ones out there?
Oh and throw Mish in there as well
Bush AND the fab 4?!?!?
With all this propaganda I keep waiting for them to pull out Mao.
B.R. at The Big Picture:
whatever GDP number comes out today, it will be in part the beneficiary of Food and Energy inflation, which does not get properly accounted for in the GDP price deflator
If it is true ¿shouldn't have it been true for several quarters?
"Investment in non-residential structures increased at a 22% annualized rate!"
I would imagine a lot of this increase is from deals done hastily in anticipation of a credit crunch and/or rate increase. Has anyone heard of big RE financing deals failing?
GDP numbers - grim picture
From an AP story:
"The Commerce Department reported that the U.S. economy was strong during the second quarter as the drag from the housing sector lessened."
Nice to know that the drag is lessening!
Mish was great a year or two back when the housing mess really started rolling. The Mike Morgan reports were some excellent "on the ground" reporting to give you a feel for what was going on.
These days, however, I find that he just lags CR with similar stuff. Still, I haven't taken him out of my RSS reader yet.
"Net exports of goods and services contributed 1.18%"
If this becomes a larger and larger component of growth I might think a little less bearishly.
"Investment in non-residential structures increased at a 22% annualized rate!"
This I view is bad unless it is productive infrastructure.
I have to admit I think a tough recession is unavoidable. I can't get over the debt load numbers. My personal anecdotal evidence just keeps on piling up: a cop friend who breaks down crying when revealing his wife surprised him with a hidden additional $50,000 in credit card debt, another friend whose lawn care guy read "rich dad poor dad" and heloced his house and bought two investment properties, a lawyer who didn't understand her home loan, students at the university I work at that I talk to usually have $5-10 thousand in CC debt....
Actually, I have to admit I find myself wishing for a recession to rid us of some affluenza and to spur a streamlining of our infrastructure. I think we need a good kick to the head for that to happen.
WSJ Article:
Falling prices on subprime mortgage bonds have cut the value of such securities held by Fannie Mae and Freddie Mac by $4.7 billion, Citigroup Inc. analysts estimate.
Even so, says a Citigroup report released Thursday, those paper losses won't necessarily be realized because prices may recover, and the two giant companies "can easily ride out" turmoil in the market for subprime mortgages, those for people with weak credit records.
Citi Analysts See $4.7 Billion
Of Subprime Losses at GSEs
I traded through the Russia/LTCM mess and it was ugly...very ugly. We're not even close to that stage but I still think people are valuing stocks based on historic margin continuing and defaults staying at record levels. This could happen but are stocks cheap? before you answer that, remember that a chunk of the EPS growth in the S&P/Dow has come from financials and buybacks. I prefer to buy stocks when they're cheap and I'm willing to sit in cash until that happens.
In my area the builders accelerated building the last two months.
So although nothing is selling, there are no job losses and they are still buying supplies etc.
They can't stop in the middle of half-built master-planned communites, as they have HOA and Mello Roos issues, the cities are leaning on them with expiring permits etc.
It was like a car realizing the light was yellow to late to stop. They could either slam on the brakes or hit the gas.
The builders hit the gas.
Bankruptcy will be the only thing that stops the builders.
"I think we need a good kick to the head for that to happen."
A recession might be a good thing collectively in the long run, but in the short run the pain tends to be heaped upon various individuals, usually those least deserving. Bush, Greenspan, Mozillo, and the rest of our overlords will come through fine - absolutely poorer but relatively richer.
Yal,
I wouldn't hold Roubini's passive investor status against him. I think he probably does this for two reasons: 1) to avoid short-term financial conflicts of interest with his economic analysis; 2) given his very secure career status he can afford to do this. I do think Roubini's objectivity takes a hit in that he tends to selectively focus on data that supports his position, but he does bring up some very good points.
"Bush, Greenspan, Mozillo, and the rest of our overlords will come through fine - absolutely poorer but relatively richer."
Yes true, but they will eventually die like everyone else.
"A recession might be a good thing collectively in the long run, but in the short run the pain tends to be heaped upon various individuals, usually those least deserving."
I think it is time to think for the good collectively in the long run. This quarter-based financial structure has stunted our forward thinking.
It will be interesting to see the detail on personal consumption expenditures on Monday.
'Housing services' are 10% of GDP. Per today's release, services (housing, medical, etc.) grew 2.2%. We'll see what the growth in housing services is on Monday, but is it plausible to think that the real value of housing services could be going up? We have all-time highs in vacancies and Case-Shiller and OFHEO point to flat prices.
Paint me skeptical of 3.4% growth.
Oops; detail on real PCEs is in Table 3B.
'Housing services' are growing at an annualized rate of 2.7%. That does not make sense in light of vacancies and flat-and-falling housing prices.
jg said: "...Paint me skeptical of 3.4% growth."
It's not as good as it looks, but Q1 wasn't as bad as it looked, either. If you measure the quarters' growth year-over-year, Q1 2007 was +1.55% and Q2 was up 1.78%.
IOW, a mid-cycle slowdown. When this happened in the mid-90's the Fed eased a little bit and things picked-up again. I expect that to happen again.
FWIW.
Sebastia
I'm a little skeptical also, especially about the strength of (net) exports. We probably spent a lot more importing crude oil in the 2nd quarter, but this price increase is eliminated in considering real GDP...
"This quarter-based financial structure has stunted our forward thinking."
Quarterly financial reports are hardly the core of the problem. How they are (mis-)used is a symptom of a larger problem - a winner take-all culture that values nothing other than wealth. Why should any CEO worry about building a business for the long-term when some financial gimickry will yield wealth much sooner? Honesty and self-respect are just sops for the rank-and-file employees that are about to get laid off to help the CEO's stock options.
"Bankruptcy will be the only thing that stops the builders."
Some truth to that! The homebuilding industry (loose term) has such an odd combo of big nationals (too many) and local guys. I know lots of smaller local guys who only build what they have pre-sold, ever. Others who spec and have survived have a very good feel for the local community in which they build - they don't buy land too far ahead and they sense the slowdowns/speedups locally.
The nationals are tone-deaf to that stuff. Their strength is big pre-planned heavily-market communities and they go boom/bust all the time.
Yal,
We all tend to think our own way is best. You, I presume, are an "active investor". It is, however, an odd decision to judge Roubini's economic forecasting according to his investment style. He has a forecasting record. Why not judge him on that?
k harris,
Do you have a blog?
I'm down to about 4-5 econ and market blogs - Big Picture, Calculated Risk, Economist's View, Mess Greenspan Made (Bad Macro) and Bondad Blog.
Between those I get a good broad view. But then I'm mostly an observer and mutual fund style investor, not a trader.
I read Roubini occasionally but don't take his portents and signs too seriously. I guess I'm still hopeful the markets will pull through the mess .
We're in a good place though right now - no debt, lots of equity, cash on hand, diversified as much as possible. I don't know what more we could do.
Hey, at least some of us try to be responsible citizens instead of spending everything we don't have. ;^)
I read Sebastian's blog over at
happy-joy-fun-everythings-coming-up-roses.blogspot
1458.99 that might have left a mark god love this game.
here is a cross post of what I put up on the zacks blog
This morning the Commerce department announced that GDP grew 3.4% in the second quarter, up from 0.6% (revised from 0.7%) in the firs quarter. This was a better than consensus number which was looking for 3.2%. However, looking at the numbers closely, there appears to be less than meets the eye. I dont want to over stress the weakness of the internals, since this was clearly a better report than in the first quarter, but people might want to hold off on popping the champagne. Growth was driven mostly by increased government spending, particularly for defense, a better trade picture, and a boom in non-residential building. The consumer slowed down very sharply. The overall price deflator rose by 3.9% in the second quarter, up from 3.8% in the first quarter, but if you strip out food and energy (who actually consumes those items) prices rose just 1.7% in the second quarter vs. 3.1% in the first quarter. Just as a reminder, GDP is Consumer Spending + Investment + Government Spending + Exports Imports.
Looking at the important components of GDP we see that consumer spending (Personal Consumption Expenditures or PCE) rose just 1.7% in the quarter vs. a rise of 3.7% in the first quarter. The slowdown in consumer spending was across the board, but was particularly sharp for durable goods, which rose just 1.6% vs. a rise of 8.8% in the first quarter. Non-durables grew at 0.8% vs. 3.0% and services at 2.2% vs. 3.1%. So much for the idea that the real estate slowdown is not affecting the consumer!
On the Investment side, things were looking up a bit, particularly Non-Residential Investment which rose 8.1% vs. a rise of just 2.1% in the first quarter. The strength was concentrated in the non-residential building component which soared 22.1% vs. an increase of just 6.4% in the first quarter. Investment in equipment and software also picked up but not nearly as dramatically rising 2.3% vs. an increase of just 0.3% in the first quarter. Residential investment, to no ones surprise was down, but the decline was only 9.3% vs. a decline of 16.3% in the first quarter. Thus housing is still declining, but at a somewhat slower rate. However, residential investment was still 4.88% of GDP in the quarter. Since 1960, it has averaged 4.63% of GDP. After the unprecedented boom in housing we had from 2000 to 2005, it would be logical to assume that the number would fall well below the average when all is said and done. The decline in housing still has a long way to go.
cross posting continues:
Federal spending rose 6.7% vs. a 6.3% decline in the first quarter, that is a huge swing. Most of the swing was in defense spending which was up 9.5% after declining 10.8% in the first quarter (the timing of when major weapons systems are bought can cause this to fluctuate significantly from quarter to quarter). Non-defense federal spending rose just 1.3% after a 3.8% rise in the first quarter. State and local spending growth was essentially unchanged rising 2.9% in the second quarter vs. a 3.0% rise in the first quarter.
We are finally starting to see the benefits of over a 25% decline in the value of the dollar since 2000. Exports rose 6.4% in the second quarter vs. only a 1.1% rise in the first quarter. Meanwhile imports fell 2.6% vs. a rise of 3.9% in the first quarter. This was very impressive given that the price of oil was up sharply in the second quarter and we were importing a much larger than normal percentage of our gasoline (as opposed to just crude oil) supplies. While the figures were not broken out, it implies that non energy imports were down sharply. That however does seem to fit with a consumer which is slowing down, so there is a dark cloud to go with that silver lining.
The change in private inventories added 0.15% to the GDP growth number after subtracting 0.65% in the first quarter. Growing inventories in the face of slowing consumer demand is not exactly something that inspires a lot of faith in the growth going forward. However, all in all, not a bad report, and clearly the economy did rebound nicely from its first quarter slump.
In addition to the numbers for the second quarter, the same release contained a number of revisions to prior year data. We find out now that growth in each of the last three years was notably slower than we were lead to believe when the numbers were released originally. Growth for 2004 was revised down to 3.6% from 3.9%, growth from 2005 was revised down to 3.1% from 3.2% and growth for 2006 turns out to be 2.9% vs. the previously reported 3.3%. I would not be surprised to see the second quarter numbers reported today revised down as well, both in the releases that come out in the next two months and then much later. However, the revisions coming in the next two months (they are normal scheduled revisions as new data comes in, Im not implying any sort of conspiracy here or anything) are unlikely to be big enough to change the overall impression that this was a much better quarter than the first quarter.
It's not as good as it looks, but Q1 wasn't as bad as it looked, either. If you measure the quarters' growth year-over-year, Q1 2007 was +1.55% and Q2 was up 1.78%.
Sebastian
You say this like it's a good thing?
When PCE avg. ending Q1 is 3.2, PDI is -6.45, the CPI is up 2.7 in the same window?
Can you be that shameless?
When everybody was saying Q2 was going to be awful Richard Berner at Morgan Stanley was saying 4% (I posted that) looks like he was closer than most. He is usually pretty good.
alec said: "You say this like it's a good thing?
When PCE avg. ending Q1 is 3.2, PDI is -6.45, the CPI is up 2.7 in the same window?
Can you be that shameless?"
Excuse me? You mean, like CR forecasting that 400k-600k residential construction workers are going to lose their jobs by this Summer (now), with the embarrassingly lame argument that the data is wrong and not his assumptions? Shameless like that, you mean?
No, I wasn't saying it with any particular intent. It's just a lower level of growth that isn't steadily deteriorating into a recession. Like has happened many, many times before.
Sebastia
Residential investmenmt has been negative since Q1 2006(-.05,-.76,-1.33,-.1.04,-.93,-.49 ) and you still don't believe that those job losses are there after seeing the BED numbers.
Jeebus, thank dog you don't run my money.
Sebastion,
Hang your hat on the Birth/Death assumptions if you like, you will continue to have something else handed back to you as occurred today.
Cheers!