David Rosenberg: this is a classic case of a muddle-through economy (Q3 GDP)

U.S. REAL FINAL SALES 60 BASIS POINTS

SHY OF DOUBLE-DIPPING

David Rosenberg
Source: Gluskin-Sheff
(via Zero Hedge)
10/29/10



To be sure, 2.0% is fractionally better than the 1.7% pace posted in the second quarter when double-dip risks began to surface. And, while a plus sign front of any GDP print may be viewed as constructive in some circles, this is an anaemic pace for this stage of the cycle because it is completely abnormal to be seeing the economy slow down heading into the second year of a recovery phase. On average, at this juncture, real GDP growth is accelerating, not decelerating, and typically advancing at a 5% clip, not 2%.

The major problem in the third quarter report was the split between inventories and real final sales. Nonfarm business inventories soared to a $115.5 billion at an annual rate from the already strong $68.8 billion build in the second quarter — this alone contributed 70% to the headline growth rate last quarter. If we do get a slowdown in inventory investment in Q4, as we anticipate, it would really not take much to get GDP into negative terrain. We estimate that if the change in inventories slowed to about $94.0 billion in Q4 (about $22 billion below Q3 levels), GDP would contract fractionally. In other words, it won’t take much for GDP to slip into negative terrain.

It would have been much more encouraging to see real final sales — the rest of the economy — do better than the tepid 0.6% annual rate gain that was posted. And that 0.6% annualized growth rate in real final sales follows a string of exceptionally weak performances — 0.9% in Q2, 1.1% in Q1, 2.1% in Q4 of last year, 0.4% in Q3 2009 and 0.2% in Q2. Historians will note that this goes down as the weakest recovery in real final sales on record, despite the fact the economy has been on the receiving end of the most pronounced dose of fiscal, monetary and bailout stimulus ever. Quite an accomplishment.

The recession may have technically ended, but outside of inventories, and the best days of the re-stocking process look to be behind us, this has been a listless recovery. At 60 basis points above zero, real final sales are just a shock away from double-dipping — a shock like looming tax hikes, accelerating fiscal cutbacks at the state/local government level or the millions of “99ers” about to fall off the extended jobless benefit rolls at the end of November.

In terms of components, the good news was that consumer spending did accelerate to a 2.6% annual rate from 2.2% in the second quarter — the best performance since Q4 2006. Non-residential construction eked out a 3.8% annualized gain, the first advance since Q2 2008. But the good news pretty well stopped there.

Capital spending came in at a decent 12% annual rate, but the momentum is clearly receding after the 20%-plus growth rates of the prior two quarters. And, as we saw with the core capex orders for September, business spending intentions are coming off the boil. Residential construction collapsed at a 29.1% annual rate in response to the expiry of the tax credits, the steepest decline since Q1 2009, and there appears to be little recovery in sight, though it stands to reason that we won’t see another decline of this magnitude again, at least not over the near-term. At some point inertia sets in, even on the moribund residential real estate sector.

It is also no surprise to see imports bulge when inventories did the same, but what caught our eye in the external trade portion of the GDP report was the sharp slowing in export growth, to a 5% annual rate trend — half the pace we saw in the first half of the year. Weren’t the overseas economies supposed to be providing a big lift to the U.S. economy?

Finally, state and local government spending dipped 0.2% — the fourth decline in the past five quarters. At a 12% share of the economy, this sector is nearly twice as large as business spending, and can be expected to be a dead-weight drag on the economy as far as the eye can see.

Here is the bottom line: the double-dip has been delayed but not derailed; despite widespread cries from the economic elite to the opposite. The economic recovery is extremely fragile and unless we get an improvement in real final sales, all it would take would be a modest inventory drawdown to pull real GDP back into contraction mode.






U.S. real GDP expanded at an as-expected 2% annual rate in the third quarter in what is turning out to be a classic case of a muddle-through economy. Inching ahead but not at a fast enough pace to have any meaningful impact with regard to addressing the unprecedented amount of excess slack in the labour market.