Friday, October 30, 2009

3Q GDP Results

This morning's Wall Street Journal has a good, short piece by Liam Denning under the Heard On The Street column.

Before you join yesterday's exuberant equity investors who bid up the market by 2%, consider Denning's remarks about the quality of the initial 3Q GDP number of +3.5% annualized growth.

He writes,

"Fully 2.2 percentage points of the third quarter's 3.5% growth figure related to vehicle purchases and residential construction, both juiced by government support. Federal spending added 0.6%

If these GDP data were company earnings, they would be what analysts euphemistically call "low quality." Investors buying into the market off the back of them are ignoring weekly unemployment-claims data that came in above 500,000 again on the same day."

Count me in Denning's camp, rather than those optimistic equity managers and analysts flocking to praise the recently-arrived US economic recovery.

Even this morning on CNBC, senior economic idiot Steve Liesman verbally assaulted former New Hampshire Senator John Sununu about supply-side economics, claiming that currently-low inventories and strong inventory liquidation of the past few quarters virtually guarantees a robust US economic recovery. Grinning as only a self-deluded moron can, Liesman insisted that Sununu quoted Say's Law to him last year in a sort of economic debate. Sununu denied it, although admitting to favoring supply-side economics.

Sununu then went on to note that, while cheering a possible rebuilding of inventories, observers should also acknowledge the several trillion dollars of debt recently printed in the form of dollars or dollar-denominated obligations to fund this juicing of GDP growth.

Beyond the near term effects of this corruption of the GDP number, Denning also suggested,

"The danger is that all these short-term fixes leave the economy dangerously addicted to taxpayer-funded steroids. The circularity in the housing market, whereby Washington provides tax breaks to first-time buyers, guarantees most of the mortgages written, and then buys most of those, beggars belief, and suggests a worrying case of amnesia following the bursting of the housing bubble."

This, I agree, is a genuine concern. Along with teaching car buyers to wait for a government subsidy, we've added teaching home buyers to expect government aid for that, too. No matter that many quickly use the government-supplied cash to leverage up their debt even further.

What this all means, in the larger sense, as Denning so effectively highlights, is that we can't even trust GDP numbers now. The 3.5% was already somewhat expected, given the depth of decline since late-2007. But knowing that, after government-subsidized activity and spending growth are removed, the remaining 3Q GDP annualized growth was only an anemic +0.7% is no cause for celebration.

This doesn't mean one cannot take advantage of misplaced enthusiasm on the part of many equity investors. But I don't think the 3Q GDP number should be a basis for declaring the US economy healthy and in full recovery.

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