US Q1 GDP..big picture concerns conflate with shorter term weakness!

The big picture is the risk that growth may well have peaked in the current cycle:

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And personal consumption expenditure flows (population adjusted) have arced in a worrying sign of secular decline for some time:

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GDP growth less private employment growth has been negative since Q4 2010, one of the very few such periods in the post war period and the weakest to date and symptomatic of weak productivity and wage growth:

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Preliminary US GDP grew by a real $22bn in the first quarter.  Given that we are unlikely to see the weather related bounce back in growth that we saw last year, we are left wondering where growth is going to come from in the second and third quarters, especially if global trade fundamentals remain weak.

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Some takeaways from third quarter Canadian GDP and other data–27 charts

Durable goods consumption expenditure rose at an annualised pace of 9.4% (autos?) in the third quarter; business gross fixed capital formation (Commodities?) has fallen for three quarters in a row following a weak Q4 in 2014; inventory accumulation slowed dramatically (?); imports of goods and services fell for the second straight quarter running off the back of two weak quarters in Q4 2014 and Q1 2015.

The change in net exports that contributed SO MUCH to GDP showed an historically large bounce, shown here as a rolling two month data piece:

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Some of the main takeaways from US Q3 GDP 2nd estimate

The growth trend is still fundamentally weak, over reliant on consumer credit and exposed to a potential inventory correction.

Post the debt fuelled 90s and 00s, growth has tailed off as shown by the annualised real growth rate over rolling 5 year time periods.  As noted in prior posts, growth between the 90s and onset of the “crisis” was very likely overly leveraged:

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Growth is still historically weak and if we take away increases in consumer credit and adjust for inventories, the trend remains so:

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Was the US Q2 GDP revision so great?

The main changes to Q2 GDP came from revisions to non residential fixed investment, inventories and government spending.  But we must a) also remember that the prior GDP base had also been reset lower following the most recent GDP revisions and b) consumer credit growth has become increasingly important to GDP growth of late (as it has in places like UK):

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US – Some interesting charts on income, GDP and new manufacturing orders from recent data

There are some interesting patterns and trends in US data: so I do ask myself, are we at the peak of the current cycle, are we as far as debt and low interest rates can take us?

US income growth has long been acknowledged to have weakened considerably yet recent data shows that the trend has indeed been weaker than first thought.  Note the following chart showing pre and post revisions to chained per capita personal disposable income:

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In the context of interest rate decisions you have to ask yourself just what are we waiting for?

I have seen that the IMF has asked the Fed to defer interest rate increases until we see clear signs of wage increases and inflationary pressure.

The request IMO is both scary and rationale given that so much of today’s National Income Accounting Identity (output=C+I+X-M) relies on factors that lie outside of its operation.  I speak of new bank generated loan growth given that income growth/distribution and investment growth still appear to be weak in the scheme of things..i.e. C+I the drivers. 

The last time the FRB delayed interest rate increases we had a debt financed consumption boom in the US followed by IR increases and a de facto financial collapse.   By raising rates we likely restrict one of the few modes of generating consumption growth in the US (note auto loans) and many other countries.  We also likely raise the impact of existing debt burdens on what are to date still historically low rates of income/wage growth.  

As such you have to ask yourself just what are we waiting for?  Well we need higher income growth, but not just higher income growth: we need a more equitable and fair distribution so that economic growth itself becomes less reliant on debt and low interest rates, and less exposed to the scary divergence of asset values. 

But the world is also changing in ways that question whether we can effectively outwait the inevitable: populations are aging and declining.  Areas where the frame can still expand in consumption terms, areas such as China, may be heading into their own period of slow growth and low IR debt support. 

Importantly will the status quo submit to a reconfiguration of the pie and can the world assume a less debt dependent economic raison d’etre?  

So yes, the rationale to defer interest rate rises is both scary and realistic, but it fails to answer important questions: what are we waiting for, how long can we wait, and are our hopes realistic? 

This is just a quick 3 minute post, but the issues are critical!

Some important dynamics from US Q4 GDP Update

A weak frame:

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Personal consumption expenditure is the most important component of US GDP and growth in real Personal Consumption Expenditure (PCE) is tied to the productive capacity of the economy.  So why on a real per capita basis has the economy failed to produce sustained increases in consumption capacity post the early 1980s?  And note that this is despite an increase in PCE as a % of GDP over the post war period. 

And also on a nominal basis:

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How reliant in fact has GDP been on the PCE component? Growth in PCE has eclipsed both GDP and equipment investment over the post war period, and significantly so.   The question begging to be asked is,”where is growth going to come from?”

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In another recent blog I exposited about asset valuations relative to GDP growth.  Now the charts above show the increasing reliance of US GDP on PCE, a component which appears to have outsized importance in GDP terms.  Well the following shows even PCE growth being dwarfed by increases in household asset values:

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In fact we can see that PCE expenditures have been less reliant on income growth post 2000s:

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And looking at nominal GDP only, if we adjust for inventories and the impact of changes in consumer credit we find a much subdued trend in growth:

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And nominal growth in expenditures have been declining:

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And motor vehicles etc continue to be an important part of consumer expenditure…

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And relative to the prior debt fuelled cycle we find that expenditure on MVPs and RV combined is a much greater…I have pointed out concerns with respect to the growth in non revolving consumer credit relative to income growth, a ratio which stands at historically high levels.

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Services expenditure has been increasingly volatile:

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And note the importance of health care expenditure:

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Interestingly if we take out healthcare expenditure from PCE, PCE as a % of GDP has been more more stable..

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And financial services expenditure has also picked up since Q1 2013:

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Interestingly, all the domestic investment components (on a nominal basis) are turning down in a synchronised way:

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Exports have been an important driver of growth recently, but more recently has fallen back as a nominal driver of expenditure: there are many explanations for this amongst them the recent decline in the oil price and weakening global demand growth.

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And of course the chart raises the question, where is the growth going to come from?

Finally, a quick peek at growth in commercial bank deposits relative to nominal GDP growth:

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Some interesting Euro Zone GDP charts

The cumulative change in final consumption expenditure of General Governments exceeds the change in GDP since 2007:

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Household and non profit organisation expenditure has languished, especially once you exclude German data:

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And the fall in gross fixed capital expenditure is heady:

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Exports have fared better:

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And imports with the exception of Germany reflect the overall economic weakness:

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A look at final Q3 GDP..was it really that strong? And what of the Frame?

One of the risks with short term data points is being fooled by their randomness.  I believe the US economic engine is slowing down and that weight of the past remains a significant head wind!

A number superlatives are cropping up re final Q3 GDP numbers:”fastest pace since Q3 2003” and others…

But what of the frame?   If we look at the average increase in real GDP over the last 4 quarters (average change in GDP over 4Qs/average GDP in prior 4 quarters) we see that real GDP growth is relatively low in an historical context and it is unclear whether the current trend is either a bounce back from earlier weakness or a position of growing strength.

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Importantly private consumption expenditure is still outsized with respect to economic growth and other important items such as machinery and equipment expenditure.  That is much of the growth in GDP to date has been due to growth in personal consumption expenditures: 

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Re Neil Irwin’s Archive “You Can’t Feed a Family With G.D.P.”…but the family has been eating GDP???

In a recent Washington Post article Neil Irwin quipped  that you cannot feed a family with GDP and illustrated this comment with a graph of GDP relative to income growth.  The graph showed the rate of growth of GDP and median income moving in opposite directions from circa 1998 onwards.  

My point is that the family has been feeding its family with GDP, to a large extent, via debt and falling savings and that it was the combination of high debt levels and weak income growth that played a major role in the crisis and weak economic growth thereafter. 

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We can see that personal consumption expenditures grew at roughly the same rate as GDP up to the early 1980s, started to grow at a moderately higher rate between early 1980s and 1997, and then spiked higher…

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Between boom and bust – US Economic context + data charts bonanza

The US economy lies somewhere between boom and bust as shown by the following graphical representation of real GDP growth.  Nevertheless, there are aspects of US economic growth that have boom type characteristics/risks; these are found primarily in the significant increases in auto focussed consumer credit and automotive production/capacityimage

Short term data has varied wildly of late; such can often obscure the underlying trend: what if we adjust for inventories and changes in consumer credit?   Well we see less noise for one, but we also see a slower underlying growth profile – yes, credit creation is part and parcel of growing expenditure but I still feel we are in a high debt/deleveraging and weak income growth dynamic that needs to be especially sensitive to growth in credit/debt.

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Q1 US GDP–was it an aberration or part of a weakening trend re-established?

It pays sometimes to wait for the dust to clear: I was just looking at Q1 US GDP.  Yes, things can change quite a bit between revisions, but the data is noteworthy as is.

Housing and utilities and healthcare (service component expenditure of personal consumption expenditure component of GDP) showed a “rather” large and coordinated rise:

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UK growth

The UK economy has been receiving a number of plaudits for its economic growth.  Initial estimates for growth in the first quarter came in at 0.8%, or 3.2% annualised.  But there are growing concerns over debt, the housing market, real wage growth and income inequality and weakness in fixed capital investment and a tail off in export led growth.

Much of recent growth has been ascribed to an increase in consumer debt and housing market activity, and we can see that there has been a notable increase in secured lending:

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Weak demand dynamics and final Q4 US GDP

I was just looking through the GDP revisions: real growth was higher because a decline in the GDP deflator and nominal GDP fell from the last revision.  Nominal net exports also fell while health care expenditure was a significant upward revision.  

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My concern rests with the underlying growth rate of the US economy, especially domestic demand and the PCE component in particular.  I have referenced this issue before.

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Q4 US GDP, some further thoughts

I will touch on some of my views regarding the significance of all this in a later post and there is a disturbing significance.

Q4 US GDP (provisional estimate) was helped by a) an increase in personal consumption expenditure that may have more to do with earlier weakness than a strengthening trend, b) a continued rise in inventories and c) a significant increase in net exports (close to 40% of the increase in GDP). 

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US quarterly growth zooms to 3.6%..

The revision to Q3 data came principally from a rise in inventories over and above those originally reported.  In fact the revision to inventories swamped the upward revision to GDP on both a nominal and a real basis. 

From the start of the crisis it was clear that consumer demand was going to be hit because of debt, and as we moved throughout the crisis through high unemployment and low wage growth.  If we were to just look at PCE, you could say the US was close to or in a recession.

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Brief US Economic update

GDP grew at a 2.8% annual rate this quarter, although it is up a lesser 1.65% Q3 2013/Q3 2012.  In the quarter growth was aided by inventories and residential structures – excluding these two components growth had risen by 1.63% on an annualised basis.   If QE is impacting the demand for residential property, then we cannot rely on headline growth to find out the underlying strength of the economy.

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Unsure why the markets are deemed to be reacting to the GDP figure..

The June export/import figure already suggested a significant revision to preliminary GDP data anyways.   I have already pointed out some basic facts about the trade figures which should soften some of the euphoria.  Besides, a 10 point move on the S&P can be attributed to any a number of factors, many of which are random and unrelated to the particular news item, and the money shift required to make such a move is so small that a blink of an eye would sound like thunder in comparison.  

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US Q2 GDP Components

Bear in mind that this is the first estimate of Q2 GDP: growth looks to have stalled in the second quarter. 

What growth there was, has been largely dependent on the property component of gross domestic investment.   Net exports detracted from growth, although both exports and imports recorded stronger growth – it would be interesting to see how this pans out in future revisions though.  

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