(See, when the books can be cooked this easily to make a recession "not" a recession, or perhaps making a depression "just" a recession--then it is just too easy for our benevolent rulers to be dishonest and this is becoming an institutional regularity: keeping 'we, the people' in the dark about the iceberg the USA Titanic hit 2 years ago--you know, it's just like the unemployment rate they peg at just at 9 1/2% when it's really at 20%. What do they care? None of this affects ANY of them directly, except for re-election prospects, but when you lose, you just become a high paid corporate lobbyist sticking it to the people just like you did as a legislator. Wheeee heee heee!--jef)
***
by Tyler Durden on 01/06/2011
It is a good thing that America has a functioning, objective and analytical media, otherwise we might need David Rosenberg to point out that one of the key factors for the avoidance of the "technical double dip" was a completely unexpected number fudge courtesy of the Commerce Department which, at the most crucial stage in the economy's conversion into a re-recession, miraculously "found" $46.3 billion in personal income that "the consumer thought wasn't there before." In other words, the government literally pulled a number out of thin air which created a relative sequential boost to the economy, even though it was just a non-recurring accounting adjustment to continuous numbers and should have been completely ignored! By then it was too late (very much in the same way that the BLS has had 44 out of 52 adverse data revisions after the data has been reported, when it is too late for its to impact asset prices): it set off a chain of events which resulted in a jump in ISM, diffusion and various other indices (not to mention the BLS endless data adjustment) which caused a last second avoidance of the double dip becoming official. Oh and the Fed's QE2 did not hurt either...
From David Rosenberg:
THE REAL CAUSE FOR THE RECENT EXUBERANCE
It may have been partly due to QE2 and partly due to the latest round of fiscal goodies, which gave sentiment a lift even though the change doesn’t fill people’s pockets until this quarter. And there is no doubt that the Europeans have managed to convince everyone that the debt problems are behind us ? that has helped out too in terms of underpinning confidence.
The real kicker was the fact that personal income was revised up $46.3 billion in the second quarter. This was huge (?) the Commerce Department found $46.3 billion for the consumer that it thought wasn’t there before. This made the difference between income being up at nearly a 6% annual rate that quarter and 3%. The newly found income carried some important spending momentum with it into the third quarter and this was really big in terms of influencing people’s perceptions of how the economy was performing. When double-dip risks were at their peak, it was when Q3 GDP was released initially and it showed a mere 1.6% annual growth rate, which was even weaker than the 1.7% print in Q2 (which was less than half the growth rate of Q1). Then Q3 GDP was revised up to 2% and then all the way to 2.6% and that is all she wrote as far as the double dip for 2010 was concerned. And it now looks like we are going to see something closer to 3.5% for Q4. So what happened was that consumers had more income than was thought previously and while (like the payroll tax cut for Q1) this is really just a LEVEL shift in earnings, there is an initial thrust to growth rates, at least for a few months. This is essentially the reason why, along with perhaps a moderate wealth effect from the stock market runup, the holiday shopping season surprised to the upside.
This is a nice story. It explains why we were wrong on the Q3/Q4 double-dip scenario, but going forward, this income revision and its impact on spending can be considered yesterday’s story. As we said, there is the current payroll tax effect, but this will be contained to the first quarter and the one thing history teaches us is that tax cuts that are temporary in nature carry with them virtually no multiplier impact into the future. Look for Q2 of this year ? and likely Q3 as well ? to turn out to be as disappointing for the market, as was the case for these exact same quarters in 2010. In other words, look for a repeat except this time around we don’t have a Fed and a Congress that is going to pull another rabbit out of the hat during the summer and fall.
Oh yes, we would be remiss if we did not mention the fact that this overbought equity market has already priced in this “bullish” first quarter scenario. What it hasn’t yet discounted are the hurdles that lie ahead in the second and third quarters of the year.
And with that down, here is why Rosenberg rightfully anticipates that the endless data fudging will soon end, resulting in the long overdue final correction to GDP.
CAN WE SEE 4% GDP GROWTH FOR Q1? YES, BUT LOOK FOR AIR POCKETS THEREAFTERYes, you read that right. But why would that come as a surprise? We had near 4% GDP growth in the first quarter of last year (the consensus was little more than 2.5% going into that quarter) and by summer everyone was still talking about a double-dip recession and the stock market was beginning to price one in. Remember that the consumer is going to be on the receiving end of a $30 billion gift in Q1 from the payroll tax cut (the only impact on “growth” is this quarter). At the same time, we are leaving the fourth quarter with more momentum, particularly on the consumer side, than we had been expecting previously.
This is not a forecast as much as something that should be on the radar screen. Nor should this be considered a change in our fundamental view for 2011 as a whole — as a year of overall disappointment on the macro front. Be that as it may, the probability of a much stronger Q1 economic outcome has risen very recently.
The points below show what it would take to get 4% GDP growth for Q1 — believe it or not, it is not a stretch to get there. With consumer spending at 3.5% (perhaps even higher), it doesn’t take much. The consensus right now is less than 3% (taken a month ago), but I would expect to see it revised up very shortly:
- Consumer spending 3.5% (the impact of the payroll tax cut)
- Residential investment 2% (the monthly construction spending numbers have risen modestly off the lows)
- Non-residential spending 5% (the architectural billing index is consistent with this)
- Capex 10% (still solid but moderating as the latest core orders data are predicting)
- Net exports swing from $470 billion to $460 billion (net addition of 0.4%)
- Inventories from $73 billion to $68 billion (drag of 0.2%)
- Government 1.5%
What is important is what happens in the second and third quarter when we see the U.S. economy hitting an important air pocket. In Q2, there is a loss of fiscal support at the margin. Moreover, we will be deeper into this renewed leg of the downturn of home prices, with negative implications for the household wealth effect, confidence, and spending. We will be seeing the peak impact from the runup in energy prices too. The inventory cycle has pretty well run its course as well (it was responsible for half of the GDP growth in 2010). It would also likely be prudent to assume that some risk aversion will resurface from the renewal of European debt concerns in March after the Irish elections (if the opposition party wins, expect the EU deal to be renegotiated and the debt to be restructured, and if that happens, look for other countries to follow suit). Of course, we have the debt-ceiling issue to contend with in March-April and the GOP are dangling $100 billion of spending cuts in front of the White House in order to get a deal done. This is not last year’s lame duck Congress. And this doesn’t add to uncertainty and possible disappointment in the second and third quarter?
The Fed is not going to be able to embark on more balance sheet expansion unless things were to get really ugly given the new Congressional oversight and the longer list of “hawks” that are FOMC voters ? this comes to a head in June and remember what happened last year when Mr. Market hit a pothole as the Fed contemplated its elusive exit strategy. It would be irresponsible to ignore these risks.
All we know about Q4 is that we should see a decent pickup in capital spending ahead of the end of the bonus depreciation allowance, which will merely create another problem for 2012 but the story here is (i) consumer-led first quarter, followed by (ii) air pockets in both Q2 and Q3, and then (iii) a capex-led fourth quarter. Moreover, a 2012 recession cannot be ruled out. In fact, elections are great years to have recessions: 1960, 1970, 1980, 2000 and 2008! How about that Mr. Potter?
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