• Embed Doc
  • Copy Link
  • Readcast
  • Collections
  • CommentGo Back
Download
 
http://zerohedge.blogspot.com/2009/04/spin-on-6-gdp.html Wednesday, April 29, 2009 The Spin On -6% GDP
Posted by Tyler Durden at 1:02 PMMore sanity from David Rosenberg:
 We have to keep an open mind and respect Mr. Market
There is an old adage that a market which does not respond bearishlyto bearish news is clearly not a market in a bear phase. As financialeconomists, we have to keep an open mind and respect the verdict thatis being turned in by Mr. Market as he continues to shrug off weakdata and embrace whatever sprinkle of good news that can be gleanedfrom the incoming data releases.
 Worst back-to-back GDP performance in 50 years
Indeed, the vast majority of economic data remain very soft even iftreated by investors at this point as old news. Not only did 1Q realGDP contract sharply -- at a 6.1% annual rate versus consensusexpectations of -4.6%, it followed on the heels of a 6.3% decline inthe fourth quarter of 2008. That marks the worst back-to-backperformance in 50 years.A few reasons that the stock market is rallying on this news
1) The second derivative can only get better from here
The market believes that the back-to-back declines of 6%+ in real GDPis a cathartic event and that the 'second derivative' (i.e. change inthe rate of growth) can only get better from here.
2) Investors like the knife companies took to inventories
Inventories were cut by $103.7B in 1Q and accounted for nearly half ofthe decline in real GDP last quarter. While demand was also soft, theview is that we entered the second quarter with an inventory/salesratio that was quite a bit lower than many forecasts, including ours,and as such we should see a much 'less negative' 2Q print on real GDP.It is hard to argue with that point, and again, this is a marketwilling to trade off of 'second derivatives' in the economic data.
3) Government spending contraction, a one-off event
Government spending also contracted, mostly on defense, whichsubtracted 0.4 percentage points off of the headline GDP number.Again, a market that has been very selective in its interpretation ofthe data is viewing this drag as a one-off nonrecurring event.
4) Upside surprise to consumer spending
If there was an upside surprise in the data, it was consumer spending,which managed to post a 2.2% annualized advance. Many pundits arepointing to this as a sign of stabilization in the most criticalsegment of domestic demand. Then again, we know from the monthlyretail sales data that the bulk of this first quarter growth took holdin January, which followed a record 30% annualized plunge as 2008 drewto a close.
 
We advise investors to view consumer rebound as a blip.While most of the post-Lehman collapse in spending, output and creditsupply is behind us, we would advise investors to view the consumerrebound in 1Q as 'noise' or a blip in what is still very likely goingto be a secular (multi-year) downtrend. The process of liquidatingdebt and rebuilding depleted baby-boomer savings is barely one-thirdover (with a savings rate of barely more than 4% from 0.2% a yearago.).
Difficult to see recession ending anytime soon
So, we view the recovery in consumer spending that has the bullsrather excited as temporary and as we said, mostly reflecting a bouncein January. What we see in the data supporting the consumer in 1Q wasa $193 billion (annualized) decline in tax payments by the householdsector. Meanwhile, organic personal income (excl government benefits)contracted at a 5.9% annual rate (-$154 bln). In the absence of arecovery in wage and salary income, we think it will be very difficultto paint a picture of the recession coming to an end anytime soon.
 Nominal GDP declines at a 3.5% annual rate
We must admit to being surprised at the bond market reaction as theyield on the 10-year note retests critical support around the 3% area,especially with NOMINAL GDP, which has the highest correlation withinterest rates, in contraction phase. Nominal GDP declined at a 3.5%annual rate on top of a 5.8% slide in the fourth quarter of last year.This back-to-back slide dragged the year-on-year trend to -0.5% from+1.2% in 4Q and +4.7% a year ago.As for equities, a client made a very key point to us this morning inthe aftermath of the data. The left side of the V does not surpriseanyone anymore -- it's a done deal. What investors will have to seefor this market to reverse course is that the right side of the V willprove elusive and end up looking like an L, an elongated U or a seriesof W's.
of 00

Leave a Comment

You must be to leave a comment.
Submit
Characters: ...
You must be to leave a comment.
Submit
Characters: ...