Dan Alpert's Two Cents

Under the Covers with Gross Domestic Product – What Might be Missing from Santa’s Sleigh

I spent most of yesterday, like many of you, enjoying the “Beautiful Day” response of the markets to the Merkozy Miracle (yes, Angela did a good job, of course it’s a default, the creditors got away with a bit more than they expected, the EFSF structure is not [yet?] viable, CDS may still trigger but not right away, and no – Greece is not going to “make it”).  It was not until last night that I dove deeply into the GDP data.

The markets trade on headlines, confidence and momentum. Macroeconomic data is – after all – so tedious. To those of us willing to toil, Europe is merely one component of a global macroeconomic re-balancing that is extremely painful and complex, and is thus prone to rolling crises that each seem to be the critical challenge obstructing the economic recovery of the developed world but are merely symptomatic of a greater illness.

The headline GDP data from Q1 and Q2 (upon revision) gave the world pause, just as it did notions of a U.S. recovery.  Similarly, the advance GDP headline number for Q3 would seem to make it look as though arguing that the U.S. economy might contract in the short term is not reasonable.

As always, however, the GDP number requires some parsing. So let’s have a peek and see where the headline 2.5% came from (all in real terms – inflation-adjusted):

First – two contrasting figures –

  • Personal Consumption Expenditures (PCE) – what we all spend as individuals – accelerated smartly at an annual rate of 2.4% (good relative to Q2’s 0.7%).
  • Disposable Personal Income (DPI) – what we have left to spend after tax payments – declined 1.7%.  This was the first decline since Q4 2009.

This of course caused the savings rate to decline dramatically to the lowest level (4.1% of DPI) since the recession kicked it back up to the 5% to 6% range.  This means that the growth in PCE was being fueled by the worst possible source – dis-saving (more debt that is, plastic and installment).

It would be one thing if DPI was rising, and the consumer felt confident enough to borrow a bit more out of confidence.  But, as recent post-recession-low consumer confidence data has demonstrated, the consumer is not seeing happy days.

As I wrote last month 2011 has been characterized by the first sustained growth in consumer credit since the Great Recession (actually, it began in Q4 2010) which peaked at a three month moving average of +0.4% in July, before dropping precipitously to +0.19% in August.  The Q3 GDP data just makes clearer the source of growth that we already picked up in consumer credit data.

Consumer confidence poll data, not surprisingly, shows a worried consumer because she has just tapped herself out again (and we know that with even greater clarity as of yesterday because the biggest contributors to PCE growth were household services (added 1.43% to GDP), recreational goods and vehicles (“Summer dreams, ripped at the seams – but, oh, those summer nights“) and the perennial favorite, healthcare. Government spending, I suppose thankfully, went flat instead of eating heavily into GDP as it did in Q4 2010, and Q1 and Q2 2011. The only really nice thing was industrial, transportation and other (non-IP) equipment, but overall private direct investment contributed less than in Q2.

So the consumer decided to enjoy summer apparently.  And now he is in a foul mood because he’s maxed out again and real disposable income went negative.  And all this amidst still weak jobs numbers and declining real wages.

The proof of the pudding will be the Xmas season.

But here’s what I am seeing in that regard:  Asian exports are down in Hong Kong, Singapore, Taiwan, Korea and, perhaps even China as well (although I am still crunching data on the latter).  Falling Asian exports was one of the canaries in the coal mine in 2008 by the way.  And I don’t think we’re suddenly making toys for Santa’s sleigh in the U.S. by the way.

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