Weekly Review: GDP Crystal Ball


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Next week the market awaits the first report for third quarter 2011 GDP.  We have a recession warning without real timing from ECRI, but most assume that the warning is for next year.  It is interesting to follow the recession commentary, as most see the economy weakly strengthening right now.

I am worried now about the contraction of imports which are a harbinger of a recession.  Yes, there is an overall weak economic expansion underway, but we are walking near the edge.

There is a general correlation between Personal Consumption Expenditures (PCE) and GDP.  Depending on the metric used, the consumer accounts for 2/3rds of the USA economy

The correlation is imperfect because all PCE does not go into GDP.  Consumer eating is not really economic growth as much as survival.

Historically (meaning since 2000), PCE’s year-over-year growth rate have averaged double GDP’s year-over-year growth rate. But in this economic world of hand grenades and horseshoes, the data itself in any particular period may or may not correlate. The best we can say is that trend lines generally correlate.

As July and August PCE rate of growth is flat (meaning the rate of growth is constant), then we could assume 3Q2011 GDP would be the same as 2Q2011 at 1.3%.  But we have some tailwinds if the accounting beans fall correctly:

  • There is also a loose inverse correlation on trend lines between GDP and Personal Savings Rate – if savings fall, GDP rises.  The USA has had a falling savings rate for July and August meaning that GDP should be better than 2Q2011.
  • Imports have weakened somewhat lead by decline oil prices, and export growth is better than import growth – this should translate into a minor improvement in GDP as exports are subtracted from GDP.

All-in-all, my guess is for 3Q2011 GDP at 2% or better.  The final number is at the whim of the accounting gods.

Economic News this Week:

The Econintersect economic forecast for October 2011 (first article under author's picture) predicts very weak growth. It is worrisome that the economy is this weak as any methodology error or abnormal condition could produce the wrong conclusion. A more positive note is that there has been a mediocre improvement in the data over the last two months.

ECRI has called a recession. Their data looks ahead 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown. Although Econintersect’s data is not yet recessionary (one month look-ahead) – we take this recession call seriously. This week the actual level of ECRI’s WLI index continues its downward trend lines indicating the economy six months from today will be worse.

Initial unemployment claims fell 6,000 (from 409,000 which was revised up from a preliminary 401,000 last week) to 403,000. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – declined 6,000 to 403,000. Because of the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.

Overall the data this week showed an improving economy. There were no new recessionary flags.

Bankruptcies this Week: Privately-held JER/Jameson Mezz Borrower II, Cagle’s and its wholly-owned subsidiary Cagle’s Farms

Click here for interactive table with active hyperlinks.

weekly table

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Economy , Business
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Steven Hansen

Steven Hansen

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