Macro Economics

4th Quarter GDP is out with a stunning 5.7% (annualized) rate of increase.  Let's look inside and see if the numbers make sense.

The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, and personal consumption expenditures (PCE).

The first two are not a big surprise.  The latter, however, is dangerous to rely on.

As I have repeatedly pointed out we have over the last 18 months added about $500 billion (annually) in transfer payments to the federal budget.  This counts in the GDP report as PCE, but is not actual output any more than I am richer if I go to the bank and borrow $20,000 on my credit card.

If one was doing GDP as a "balance sheet" you'd have to subtract the addition in liabilities (debt) from the money spent, but of course GDP isn't computed that way.  This results in a nutty overstatement of GDP when it is used as a measurement of economic health, which of course is how all the so-called "economists" use it.

Indeed, that $500 billion is an annualized distortion of a whopping 3.57% of the entire economy!

There are some problems in this report as well.  The claim is made that real federal government expenditures and investment was flat (0.1% increase) .vs. an 8% annualized rate of change in the last quarter.  I'm not sure I believe that either - but it may in fact be true, in that the aforementioned $500 billion diversion could reasonably be "all there is" in terms of what the government can and does spend.  I'm particularly skeptical of this number after seeing the durables report and change in defense spending - those two numbers don't add correctly, and defense spending has been up strong all year (much to the chagrin of those who thought Obama would be drawing down our military spending and bringing the troops home!)  State expenditures are down as expected (the states are broke!) but despite all the bleating about lack of money the change is small.  You'd think there would be real cutting going on given the screams of distress - nope!

Export growth continued as did imports, but the import growth rate slowed dramatically from the third quarter.  The latter mostly appears to account for inventory additions, which was 3.39% of the GDP increase - about what I expected.  While this is additive to GDP it is not indicative by itself of economic strength.  More is required, specifically, we need to see that 3.39% taken up in final demand in coming quarters, otherwise it turns into a millstone around the neck of merchants that will instead destroy profit margins.  Nonetheless industry appears to have "taken the bet" on an economic recovery that actually takes hold.

The amusing part of the report is found in the personal income and outlays section:

Bottom line: The market liked it (although the net change after thinking about it for a while was pretty much a non-event - we're up a whole two S&P points a half-hour after release) but most of the improvement was due to inventory build and transfer payments from the government (and the government borrowed the money), not actual earned personal income.

Oh, the Census finally admitted to their revision?

New orders for manufactured durable goods in December increased $0.5 billion or 0.3 percent to $167.9 billion, the U.S. Census Bureau announced today. This increase followed two consecutive monthly decreases including a 0.4 percent November decrease. Excluding transportation, new orders increased 0.9 percent. Excluding defense, new orders increased 0.3 percent.

Remember, November was reported as an increase last month.  Remember, this was part of the ramp job in the market at the end of December.  REMEMBER?

I'll tell you what I don't like though: 15.9% year over year declines in shipments, and 20.2% decline in new orders.

And it's no better ex-transports and ex-defense - excluding defense it's 17.8% and 21.4% and ex-transports it was 16.4% and 17.7% respectively (shipments and orders), all declines.

Looking down the sheet I see exactly one column that has positive year/over/year numbers in it - defense, up 5.3% (orders) and 21.0% (!!!) for shipments, respectively.

Unfilled orders and total inventories were down hard as well with everything but computers down double-digits.  Unfilled orders for computers were up 8.8% y/o/y while communications eeked out an 0.5% gain.

Note that communications equipment is a coincident indicator of hiring in high-tech and other "good paying" jobs, since new hires typically require new communications gear such as cell phones.

There's not a lot to see here folks, other than the fact that we've still got a very weak "recovery."  There were indications of improved shipments and orders in the internals of the report, particularly in primary metals and machinery - both good signs.  And semiconductor shipments were up huge, but with this being the month into Christmas, that's not a surprise (what 'ya think goes into all the "stuff" you buy?)

But the rest of the report was lukewarm at best, and the y/o/y numbers are pretty horrid.  I'm particularly non-plussed with these given that by the time we got to December of last year we were at what everyone called "the bottom" from an economic perspective - and yet we're putting up numbers below that point - still.

Wake me up when we see annual comparisons flatten out. 

That's an actual bottom.

On January 5th the durables report for November was 'released'.

It showed a 0.2% increase.  I didn't write on it at the time, as it didn't appear to be particularly consequential.  The report, of course, came in the middle of the first-week January market rally.

But now, in the dark of night, the number has been revised - to a decrease of 0.7%.  The reason is a claimed "statistical error."

This, by the way, should have been obvious from the retail sales report, which I did write on.

Here's the ugly - the Census' link to the report is now listed as missing (that is, intentionally removed!) and what's worse the link they refer you to, the "Historical M3 Releases" does not have the corrected November data - it only has releases through October on it.

That is, November's report has disappeared.

No, the "historical" tab doesn't have it either.  Attempting to retrieve it off the link in Google's search returns a "not currently available, see historical" message - but it's not there.

You would think that such an "error" would result in an immediate press release by Census identifying the cause of the error and a corrected report, along with CNBS and the rest of "ToutTV" talking about how this "mistake" happened and alerting investors to the fact that they had made decisions based on "mistaken" information and in fact durables had suffered a second sequential decline.

YOU WOULD BE WRONG.

Are we now down to rank fraud in "data releases" from our government, revised in the dark of night without public notice or press release, with the agencies claiming "statistical error"?

Folks, honest errors are immediately admitted to when discovered and disseminated to all of the people who the government or agency knows relies on these figures for economic decisions.

But when "errors" are less than honest the person or agency committing them attempts to hide the evidence instead of admitting to and publicly exposing their mistake.

You decide.

As I have said, freight volumes are one of the "tells" for the economy that are hard to manipulate.  Well, where is it?

While rail volumes have improved since last spring, they started the year on a weaker note: U.S. railroads originated about 237,000 carloads in the week ended Jan. 9, according to the Association of American Railroads, down 12% from the same week a year ago and 28% from 2008.

2009 was a cliff-dive from 2008.  While the rate of decline has slowed, the direction of change has not reversed on a total loadings basis.

Of particular concern is baseline traffic - it is not in good shape at all and in fact is tracking below last year.

Cyclical traffic is somewhat off the bottom, but I wouldn't call it "healthy" or "strongly recovering":

Of the sub-categories that are broken out chemicals, metals and automobiles are up significantly - about half in the case of metals and chemicals, and more than half in the case of autos.  But remember - automobiles were essentially collapsed going into the GM and Chrysler bankruptcies.

Coal shipments remain down and this is of particular concern as coal is an excellent indicator of energy demand on a forward basis (since a huge percentage of US base electrical load is generated with coal.)  There is simply no indication of material recovery in that demand on the US Rail system.

Nor is there any indication of forest (wood products) demand recovery either.  Think housing and construction here folks - simply absent.

If we were poised for an actual strong economic recovery these numbers should be dramatically improving across the board, as these are all relatively long-lead items in terms of sales cycles. 

They're not.

So Fitch now issues a "warning" to the US:

"Difficult decisions will have to be made regarding spending and tax to underpin market confidence in the long-run sustainability of public finances. In the absence of measures to reduce the budget deficit over the next three to five years, government indebtedness will approach levels by the latter half of the decade that will bring pressure to bear on the US's 'AAA' status", he said.

There isn't going to be any "meaningful measure" to reduce the deficit over the next three to five years.

Fitch notes reality, however:

Mr Coulton said the US is vulnerable to "potential interest rate shocks" due to its reliance on short-term debt and foreign investors. The average maturity of US government debt has fallen to four years, compared to seven for Europe's AAA club, and 10 for Britain. "The share of three-month bills has risen very sharply as a result of recapitalising banks," he said.

This raises the danger of a roll-over crisis. Chinese, Japanese, and Mid-East investors own almost half of the stock of US debt. They are more likely to liquidate holdings than domestic investors, if there were a loss of confidence in Washington or the Federal Reserve. Short maturities mean that any jump in interest rates will be felt quickly.

Right.  And in this regard Fitch is spot-on.

But see, the purpose of a ratings agency is supposed to be to downgrade ahead of the event that blows you to bits, so people can be warned in advance.

Of course the raters didn't do this with subprime mortgages, they didn't do it with liar loans, and they haven't done it with sovereigns.

The fact of the matter is this - Fitch will "downgrade" America only after the rollover risk detonates in our face and the people who should be relying on their opinions get burned - just as has happened since this mess began.

If Mr. Coulton was not a eunuch he would have issued a downgrade now, given the fact that:

1. Our CBO says we're screwed and will run another ten trillion dollars in debt through the end of the decade.
   
   
2. President Obama, despite claims he would reduce deficits during the campaign instead has increased them, as is now being shown by both tax receipts and spending in FY2010.
   
   
3. There is solid evidence that in point of fact our government may have turned the $500 billion in "handouts and giveaways" that were ladled out over the last 12 months into structural additions to entitlement spending.  Among these are repeated calls for more clunker cash, extensions of the homebuyer tax credit and pledges to continue indefinitely unemployment extensions, along with "handouts" to state and local governments that came with forced lock-ups of spending levels, thereby guaranteeing that deficits would not be reduced.

To make the case that The United States does not deserve a downgrade on its sovereign debt right now one must at minimum be able to make a cogent argument that #3 above is false.  That piece of the puzzle alone is sufficient to GUARANTEE that we will never be able to reduce deficits below approximately $1 trillion annually, tax increases or no tax increases!

Simply put the problem is too much spending.  The Keynesian prescription only works when there is additional debt service capacity in the private sector - when that is exhausted then the engine that is necessary to turn pump-priming into expansion (that is, private credit expansion) is absent and you are simply throwing the stimulus money down a black hole.

This recession began with the exhaustion of private debt-service capacity.  It is for this reason that all the claimed Keynesian "solutions" have not and cannot work - there is simply no more margin between debt service capacity and outstanding debt levels in the private economy.  This is proved month after month as bank credit continues to contract and consumer debt loads come down month after month.

Our government will not stop and abandon this failed course of action until it is forced.  The ratings agencies would be doing The United States and her citizens a great favor if they were to issue a one-notch downgrade right now with a promise of more unless the Keynesian game is immediately halted.

Sadly, none of Fitch, Moody's or S&P have the balls to do it.