Is the Economy's Number(s) Up?

The second-quarter GDP data indicate that the economy grew at a paltry 1.3%. The data was probably heavily influenced by the so-called “snap-back” from the mild winter which padded first-quarter numbers. However, economists were figuring the snap-back into their estimates which resulted in a Street consensus forecast of 1.7% Q2 GDP. Some pundits criticized this gloomy outlook. Upon the release of the 1.3% final reading of Q2 GDP, they promptly pointed to the better retail sales and consumer sentiment seen during the third quarter. Admittedly, Q3 data might look a bit better than the Q2 data (the Street consensus forecast calls for 1.8% GDP in the third quarter), but the September data is casting doubt on that outcome. Most disturbing are the Durable Goods and Personal Income data. Household incomes barely budged, but prices, particularly prices of goods which consumers cannot easily reduce consumption (such as food and energy), edged higher. It is true that fuel prices have dropped during the past two weeks, but that is due to demand destruction and the fear or more demand destruction. In other words, the markets fear a broad global slowdown thereby reducing energy consumption. At best, consumers may be able to tread water. However, if the slowdown intensifies, we could see the moderate gains in job creation and the meager wage growth we have thus far experienced in 2012 turn flat or even negative. However, we should note that, versus inflation (as measured by PCE), household incomes actually fell by 0.3% in August. Remember, August was supposed to be the (latest) month that the economy finally turned. Durable Goods Orders were most troubling. We usually do not focus much on the headline number due to the volatility of the transportation component (particularly commercial aircraft), but Durable Goods Orders fell off the table last month. It was reported that Boeing received an order for just one aircraft in August. The Street consensus forecast of -5.0% had built in downturn in transportation orders. To have a drop of 13.2% is reflective or recessionary data. Apologists for the economy had not legs on which to stand when the core number also turned negative, coming in at -1.6%. Following the poor August Durable Goods data, supporters of a sustained recovery waited with great anticipation for Friday’s release of the Chicago Purchasing Manager report. This report is considered a good bellwether for manufacturing throughout the U.S. and is greatly influenced by the automotive industry. Surely, it was thought, that the Chicago Purchasing Manager data would indicate that the economy remains on a path (albeit a bumpy one) to recovery. Their hearts sunk when the report indicated that manufacturing activity contracted for the first time since September 2009. There are times when an index, such as the Chicago PMI, can trend negative due to drops in components which are considered less critical than others. However, the drop was precipitated by a decline in the New Orders component, which fell from a relatively good 54.8 to a troubling 47.4. In fact, all components fell with the exception of Supplier Deliveries (52.1 versus a prior 49.9) and Prices Paid (63.2 versus a prior 57.0). However, all that meant was that businesses may have over-ordered raw materials and components from suppliers and they paid more to do so. The results could be fewer components and materials ordered in October and a pause in hiring. We do not see much impetus for the economy to gain momentum the last three months of the year. Tom Byrne tom@bond-squad.com. www.bond-squad.com www.mksense.blogspot.com 347-927-7823 Twitter: @Bond_Squad Disclaimer: The opinions expressed in this publication are those of the author. They are not, nor should they be considered solicitations to purchase or sell securities.