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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The one bright spot in manufacturing new orders, motor vehicles and parts demand is a worry

Yep the employment numbers looked reasonable but we are going to have to see better wage growth going forward and much less reliance on consumer credit if we are to believe that the economy is no longer skating on thin ice: 

Motor vehicles and parts new orders have kept on rising:

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But non revolving debt is growing at its hottest pace since 2000/2001

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And as a % of disposable income, much higher:

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And relative to income growth, well, historically high levels again:

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I just do not feel comfortable with these kinds of fundamentals underpinning growth expectations.

Another way of looking at US employment data

There is an increasing amount of data pointing to a general deceleration in economic growth since the summer, yet US employment numbers keep on movin’ on.  Instead of going through the repetition of data points I thought it would be useful to look at employment data from another angle.

Typically employment numbers are meant to be a coincident indicator of economic activity, but this is an average characteristic.  There will be times when it will be a lagging (catch up) or a leading indicator (job losses).

Economic activity in the US surged post the winter weather interruptions and peaked around mid summer…I was wondering whether this peak in activity following a long period of relative weakness had influenced hiring somewhat and to what extent hiring has lagged this initial surge in activity:

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The above shows the monthly unadjusted change in total private employment over 2012, 2013 and 2014.  We can see that the differential really opened up from mid summer onwards.

So let us look at the differential between 2014 data and 2013/2012:

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Well we can see that pre May 2014 numbers were below 2013 and 2012 and post June were above, especially 2014 on 2013.  So let us look at unadjusted new order data and then compare it to employment data above:  image

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New order data rose strongly to mid year relative to the prior two years then fell back relative to other years, so I wonder if employment data has fully reacted to this slowdown.  It is an interesting point…

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 belated look at December US retail sales..

As world growth appears to be slowing an awful lot is riding on US retail sales, unfortunately.

Retail sales growth has weakened since the post winter bounce earlier in 2014.  Excluding motor vehicles and parts the picture is weaker still.  The only bright spot is falling inflation, but only on a shorter term view.   Retail and food sales per capita adjusted for CPI are not much higher than they were in 1999. 

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US Manufacturing orders..underlying weakness raises questions about growth going forward.

The global economy lost further momentum as 2014 came to a close, according to Markit’s worldwide PMI surveys. The JPMorgan-sponsored Global PMI fell to a 14-month low of 52.3 in December, down from 53.1 in November.”

The latest batch of Markit PMIs as noted show a 14 month low in global expansion.   This contrasts with some confidence in a number of quarters with respect to US economic momentum in the light of “strong” Q3 GDP and recent gains in employment.   I have commented on the GDP and employment frames in earlier posts which suggests that less focus should be placed on monthly data and more on structural imbalances and trends.

That said recent manufacturing order data may be suggestive of a slowdown from the elevated figures seen earlier in the summer.  While this may not signal a downturn it does raise questions over the underlying strength of growth going forward:

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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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US consumer debt and income dynamics are quite constrained!

Low savings rates, high levels of consumption relative to income and a heightened dependence on current transfers for income growth looks to be a poor frame for consumption growth.  Too much reliance is being placed on “auto loans” and a steady if unspectacular growth in employment.

US consumer debt has been growing at a reasonable pace, and non revolving debt particularly so.  In fact if we relate annual average growth in non revolving debt to growth in personal disposable income (using 3 year rolling averages) we find that non revolving credit growth is at historically high levels relative to income growth.

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US employment data..some important charts..secular stagnation?

I have been through the last US employment report and a few charts stood out from the rest:image

The above shows that the long term growth in total private sector employment in the US has fallen off the edge of a cliff since the late 1990s.  The trend was already set in the post 2001 recovery and has continued to date.   Employment growth is particularly important for economic growth.   The above chart is astonishing in this respect.  I have summed rolling 5 year growth in employment and divided it by the employment level 5 years previously…the one adjustment I have made is to set 5 year previous employment figure as a high water mark input.

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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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Some other asset focussed and hence QE relevant charts…

Scratching my head?  How far does this asset thing need to be pushed before mission accomplished?

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The blue line shows household and NPO asset per capita relative to annual growth in income per capita (over rolling 10 year periods).   The red line shows the annualised increase in disposable personal income per capita over 10 year rolling periods.

Now clearly assets are growing relative to income at a time when income growth is declining.   QE is filling the income growth gap.

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US unemployment pictures

Some charts on US employment data drawn from the BLS CES and CPS surveys. 

Yes employment is back to where it started the recession, but adjusted for civilian population growth not even close, and part time and self employed data points are still hanging in the reverb.   Participation rates are also still way below pre recession peaks and there is a question mark over multiple job holders, which have risen significantly of late and may have contributed to some of the more impressive recent job gains.  

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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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US Manufacturing new orders and the Fed Funds Rate…

Total new manufacturing orders rose 1.56% in February following declines in January (1.03%) and December (2%).  Orders are 0.6% below February 2013 levels.   The bigger picture is of the course the more worrying:

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And the bigger picture is that historically declines in orders have always been accompanied by declines in the Federal Funds Rate.   I will not need to go too far into the fact that rates have not risen as they usually do.  So why is the Fed tapering?   Well, while asset prices have risen fine and dandy, underlying economic growth has not similarly responded. 

And we see the same picture with respect to producer price inflation:

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If QE has not worked and interest rates are as low as they can go and sovereign debt is as high as it can go, where do we go from here?

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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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US employment data…perspective 3

This is the third perspective dealing with concerns over US employment and related US growth dynamics:

A great deal of the growth in employment over the last few decades has been concentrated in the health and education sectors.  Student debt has become a major problem post the onset of the current financial crisis and health care has likewise become, over time, a tremendous economic cost and a structural barrier to growth.

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US employment data…perspective 1

The last two employment reports have been casting a shadow over the strength of the economic recovery.  

Just focussing on the last two months of data probably does some disservice to the underlying fundamentals.  October and November were relatively strong months, and although we can see a slowing trend (blue line, 4 month average), the last two months may be more correctly viewed as an adjustment.  The weather may or may not have had an impact. 

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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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