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Wednesday, January 30, 2013

GDP Negative, ADP Employment Great

GDP headline is -0.1% contraction in the fourth quarter. The government "pump" in the third quarter was of course followed by a shortfall in government spending in the fourth quarter, which is really most of the problem. Gross private domestic investment went negative on inventories. The relative change in exports went negative also - international weakness is a factor here.

The takeaway from advance GDP, which will probably be revised higher, is that Q3 wasn't really +3% and Q4 wasn't really negative. Shall we say an "election-related" effect is observed. 

PCE was generally strong, but the details are more worrisome than the headline. The Q4 spending on clothing, food and gas & energy categories all declined. These are seasonal adjustments, but they point to just how strapped many households really are, and that was before the payroll tax hike, which will have an effect and is having an effect.

ADP reports +192,000 jobs in January, with massive growth in small businesses, moderate growth in medium size businesses, and a decline in large businesses. There are two factors here. First, Sandy should produce a kick up in small business employment in the NE region, and I believe it has. Second, ADP figures are probably biased because more businesses will shift to ADP due to the increasingly complicated federal regulatory environment. For most of this year and part of 2012, ADP should have been picking up small businesses. 

Nonetheless, I do not think US growth was "really" negative. I peg US growth at about 1.8% in the third quarter, which would have shifted down to about 1.4% to 1.5% in the fourth quarter, except that there is a pulse effect from Sandy which will run at last through May, which should have shifted Q4 up to about 1.8%, and should add just over 1/2 a percentage point to GDP growth in Q1 2013. Q1 should be positive. After that things get quite ugly. 

However, although PCE should remain relatively strong due to the much higher contribution of government transfers to personal income relative to any other post WWII period, the US economy is cycling into recession. The mechanism is declining real per capita incomes which will be accelerated by the payroll tax hike and service company cuts. Manufacturing now is too weak to compensate further, and defense spending can't be used to hold us up. 

Comments:
The Q4 spending on clothing, food and gas & energy categories all declined. These are seasonal adjustments, but they point to just how strapped many households really are, and that was before the payroll tax hike, which will have an effect and is having an effect.

That seems to be what Amazon is reporting.
 
Have to disagree with you Maxed-Out-Mama. The view I have from the street is that the 4th quarter saw a very extreme inflation effect. On an entire range of products I purchase I noted prices going up very significantly. This includes epoxy (devcon), sandpaper and the most recent both FIOS service and garbage pick up; just to name a few that made an impression. The effect of all these increases in cost has been a pull back in spending in our household. The effect of the inflation, which seems to go unreported by the government stats is less economic activity.

Second, the small business men in my area were all stunned by the election results. Many expected a turn over in governance and were holding on in expectation of better times to come. That bubble has been burst and these businesses that are remaining are all cutting back their plans for any kind of growth or spending. Capitol expenditures by these small businesses are flat to negative, if what I see locally is any indication of the wider economy.

Third, some long term businesses are throwing in the towel. Two local businesses that survived on servicing the local middle to upper middle class population (stores) folded after the holidays. Both were long time companies which had been in business 22 and 50+ years respectively. Both depended on discretionary spending. There is simply not enough left to support these businesses or they saw the writing on the wall and decided to get out while the getting was good.

Lastly, the rise in reported employment is due to the inclusion of some illegals that now know they can state indefinitely and the transition of a lot of low level folks to part time workers. Neither is a positive to the economy.

We are entering a recession at best, a depression more likely. The environment is starting to look like the stagflation of the 1970s, except that the real rate of inflation is not being reported.

 
Mr. S:

The stagflation of the 70's would be far preferable to what's happening now, in my opinion.

Inflation is not showing up in the stats because wages and asset values are nominally stagnant or declining. The price of the needful is increasing, but our ability to pay for it is decreasing--so Viola! Low velocity of money and no inflation.

That is, until all these savers decide that they no longer trust the dollar as a store of value, and decide to buy something with it. Then things change in a heartbeat.

 
Neil,

I get your explanation, but what I see in real prices says otherwise. What I am seeing is rapidly increasing prices in a number of commodities. Not increases on the order of 5 or 10 percent, but increases such as 30 to 40 percent.

Now it may well be that the 1st quarter inflation figures show this, but based on what I was in late November through December I would have expected the Federal stats to reflect this, which they do not.

What I see is a rapidly falling standard of living, along with a general seizing up of the economy.
 

I agree with you that we're seeing inflation in basic necessities. But with wages and asset prices remaining low, the inflation stats don't register it.

That's the difference between now and the 70's. Back then, asset values (such as home prices) went up along with everything else, so in the end the middle class came out tolerably well.

Now, Washington has spent the last 30 years trying to eradicate the most effective inflation hedges, and they've done a pretty good job of it. We aren't going to be so lucky this time.

 
Mr. Sensitive - CPI is calculated based on shares of income spent. So CPI-U, in an economy like this, gets modified on the basis of constantly declining living standards. If the great bulk of the US population shifts to buying lower quality food, for example, to prevent that segment of their household budgets from swallowing up other necessary segments, CPI does not reflect raw price increases, but adjusted price increases.

So say a household used to spend 15% of their income on food. The prices rose, and incomes did not. So the household shifted their food buying to lower quality products (organic > standard, high-end meats toward low quality animal fats/protein, prepared to raw, high quality fruits/vegetables to cheapest available) to maintain that percentage. But because inflation is measured on an ever-changing basket of goods, the real price increases will hardly show up in CPI.

When consumers respond to declining real incomes by shifting spending to cheaper goods, much of the real inflation rate is hidden.

Of course, if you are China you feel it!
 
Ahhhhh...soooo. Me understand now.

Well the fact that folks are getting a lot less for their money is then not reflected.
 
Mr. Sensitive - but it does tend to show up in GDP, because when a big group of households start curbing discretionary spending, it diffuses through the economy.

So some of the retail stores start shutting down, more discretionary type spending is cut, and margins, esp. in service businesses, decline.

Insurance companies - esp. car insurance - are getting hit. People cut that bill to the minimum, although of course all insurance of the property/casualty type has to increase because of low investment returns.

Also the increased social benefits are very stable in economic downturns in comparison to wages. But they are hit very, very hard by inflation such as you are describing. Everybody has to eat. Most people want to stay warm. And if you buy a car battery or tires or shingles or wood or paint or garbage bags, it cuts into the money such households have for other things, like cable, phone, entertainment and small luxuries.

One of the reasons I watch the regional manufacturing surveys is to catch that first rise in input costs.

Now the Bernanke Helicopter is going to go straight through to commodities, and that's going to cut discretionary spending about as much as the payroll tax rise.
 
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