"Soft Patch" - Teetering on a Full-On Double Dip? - Spooks Wall St.
Earlier today while catching a bit of Fast Money on CNBC, an observation was made that for "the rest of us" really comes as no big newsflash, but apparently is a shocker to many of those living in Wall Street (Said with regard to US retail sales):
"I think it's high-end or nowhere right now"
CNBC
Fears Grow Over Double-Dip RecessionOne fund manager calls it a horror show, others are predicting the Federal Reserve will have to extend its unconventional measures and stocks across the world are falling heavily.
The data from the world’s largest economy has fallen so sharply that investors have been caught off guard, raising fears over a double-dip recession.
It was a big fall in ISM Manufacturing PMI data on Wednesday that triggered the fall in stocks and saw money pour into Treasurys, pushing the yield on the 10-year note below three percent.
The index fell from a very healthy 60.4 to 53.5 and while still indicating growth the scale of the fall has worried some economists who say it is too early to call this anything more than a slowdown.
“The move down wasn’t so surprising, as the headline index usually doesn’t hang above the 60 level for too long. That said, the large decline in the May new orders index (-10.7 points) does raise the concern that the slowdown may have a bit further to go,” Neil Soss, the chief economist at Credit Suisse in New York, wrote in a research note.
The sharp decline in the ISM manufacturing index to a 19-month low of 53.5 in May, "will only add to fears that the economy has hit another 'soft patch'," Paul Ashworth, the chief US economist at Capital Economics, wrote following the data.
“It looks like this recovery has hit its second "soft patch" which, for a recovery that is less than two years old, is troubling to say the least,” Ashworth said...
Official Government GDP Figures Questioned
On several occasions in our community now I have raised the prospect that the way our government has been computing GDP could be more than a little faulty. While I agree with those who believe that the last technical recession ended in 2009, I have been far less convinced that it ended as early in 2009 as the NBER (non-governmental arbiter) concluded, and even less sold on the idea that GDP has been chugging along at "near-trend" growth rates since (about 3% or so, annually).
Dshort.com
Will the 'Real' GDP Please Stand Up?
How do you get from Nominal GDP to Real GDP? The Bureau of Economic Analysis (BEA) uses its own GDP Deflator for this purpose. In a recent commentary Rick Davis, the founder of Consumer Metrics Institute, made some interesting observations on the BEA's adjustment technique.
His comments prompted me to investigate what Real GDP would look like if we used the PCE Deflator or the Consumer Price Index for the adjustment. First, here is the key comment from Rick:
The importance of the price deflator used by the BEA cannot be overstated. In calculating the "real" GDP the BEA continued to use an overall 1.9% annualized inflation rate, which is substantially lower than the inflation rates being reported by any of the BEA's sister agencies. The mathematical implications of the deflator are simple: a lower deflator creates a higher "real" GDP reading.
(May 26, 2011 Commentary)
Rick goes on to show that the Real GDP reported by the BEA, 1.84% to two decimal places, shrinks to 0.56% if the Consumer Price Index were used as the deflator. Rick's observation was sufficiently striking to catch the attention of John Mauldin, who referenced it under the heading Gaming the GDP Numbers in his newsletter.
Let's take Rick's substitution of CPI for the GDP deflator a couple of steps further. I've prepared a set of charts showing Real GDP, quarterly, since 1960. The first is the official series as calculated by the BEA with the GDP deflator. The second starts with nominal GDP and adjusts using the PCE Deflator, which is also a product of the BEA. The third adjusts nominal GDP with the BLS (Bureau of Labor Statistics) Consumer Price Index for Urban Consumers (CPI-U, or as I prefer, just CPI)...
Click for a larger image
As we might expect, the two deflators from the BEA produce similar results. The average (arithmetic mean) Real GDP for the first and second charts is the 3.2%. But note the variation from quarter-to-quarter and especially the weaker GDP since the end of the Great Recession in the PCE-adjusted version. In fact, I had to display the latest GDP to two decimal places to see a value other than zero.
The CPI comes from a different government agency, the Bureau of Labor Statistics, and is calculated quite differently. As an inflation measure, it is much better known than the GDP and PCE deflators, and its growth rate has been higher than the two BEA metrics (see this illustration). If we use CPI as the deflator to compute Real GDP, we see series with a significantly lower mean, higher volatility, and Q1 Real GDP at a stunningly negative -1.3%.
Given the higher volatility of the CPI-adjusted series, I wouldn't necessarily see any strong implications for Q2 GDP. However, it is perhaps telling that both the PCE and CPI variants are well below the official Real GDP...
Wall Street Journal
Do you see a double-dip shaping up? (WSJ Poll)
"Every piece of economic data has been dreadfully weak, and it appears as though the economy is facing the potential of a double dip," said Tom di Galoma, managing director at Oppenheimer & Co. "I would certainly bet that another round of QE [quantitative easing] is more likely than a Fed rate hike." What do you think? Is a double-dip inevitable? Or are these normal economic fluctuations?
Community Poll
Poll State of US Economy