Yesterday we had the pleasure of enjoying a 200 point rally in the Dow driven by a headline GDP report of +3.5% in the third quarter. The headline number looks great; however, when you pull back the covers it isn’t that pretty. Today’s report of a .5% reduction in consumer spending for Sept further enforces that fact that GDP last quarter was a total joke, and very unsustainable.
Let’s take a quick run through the GDP numbers and de-stimulus them, much like Mr. Denninger did here.
First, lets get the facts:
- Headline GDP was +3.5%
- Motor vehicles added 1.66% (Cash for Clunkers)
- Government spending was up 7.9% (Stimulus package)
- Personal income decreased by .5% ($15.5 billion)
- Personal taxes increased by $4.8 billion
- Personal disposable income decreased by $20.4 billion
I like how Karl Denninger setup the math, so I’m going to do it the same way:
GDP – Cash for Clunkers – (Government Increases * Government % of GDP) = Adjusted GDP
3.5% – 1.66% – (7.9% * 30%) = -.053%
That looks a little more realistic. Jobs are still falling off a cliff, incomes are falling, prices are starting to slip, taxes are up so one would expect that GDP would be very soft. By removing the impact of a one time stimulus that simply pulled demand forward, we get a much better picture of things to come. The recession appears to be far from over.
In his analysis, Karl also ran the real impact of personal disposable incomes and calculated it to be a Quarter over Quarter decrease of 7.2%. That is HUGE. Couple this with the fact that personal spending was up, we are again just kicking the can down the road.
The WSJ backs up this analysis as well:
The 0.5% drop in spending was the largest since December 2008, when the recession was at its worst. Most of the drop was in durable goods, which include autos. Outlays on nondurable goods and services posted a gain from last month. Spending rose 1.4% in August, revised up from a previously estimated 1.3% increase. That gain was driven by “cash for clunkers,” which let motorists swap gas guzzlers for newer models. The car-rebate program started in July and ended in late August.
The subsidy helped push the economy to what the government reported this week was a 3.5% increase during the third quarter, seen as an end to the recession. But the recovery is expected to be slow, and questions abound to its sustainability once government stimuli fade. Another popular incentive, the first-time homebuyer tax credit, lapses in November, although the housing industry is trying to push an extension through Congress.
[snip]
With nearly 10% of the U.S. labor force out of work, incomes aren’t going up much. September’s flat reading followed a 0.1% August gain, revised from an originally reported 0.2% increase.
Personal saving as a percentage of disposable personal income was 3.3%, compared to 2.8% in August.
This one time temporary boost might have been enough for the NBER to declare the recession over – for now. Just don’t get your hopes up that we have truly turned the corner. When you get to pick and choose the numbers to report, while ignoring the long term effects of your policies, it isn’t hard to generate one time pops. Just remember as Dave Rosenberg points out in this mornings Breakfast with Dave:
While it seems very flashy, 3.5% growth is far from a trend-setter. Let’s go back to Japan. Since 1990, it has enjoyed no fewer than 19 of these 3.5%-or-better GDP growth quarters. That is almost 25% of the time, by the way. And we know with hindsight that this was noise around the fundamental downtrend because the Japanese economy has experienced four recessions and the equity market is down more than 70% from the peak. What is important for the future is whether the U.S. economy can manage to sustain that 3.5% growth performance in the absence of ongoing massive government stimulus. In other words, it may be a little early to uncork the champagne.
Well said Dave… Well said.
