David Rosenberg isn’t fooled by the “better than expected” GDP data this morning. After taking a look under the hood, the number is actually much weaker than it looks:
The growth bulls are out in full force today in the aftermath of the headline 5.7% QoQ annualized print on fourth quarter GDP growth in the U.S. We offer a slightly different perspective.
First, the report was dominated by a huge inventory adjustment — not the onset of a new inventory cycle, but a transitory realignment of stocks to sales. Excluding the inventory contribution, GDP would have advanced at a much more tepid 2.2% QoQ annual rate, not really that much better than the soft 1.5% reading in the third quarter.
Second, it was a tad strange to have had inventories contribute half to the GDP tally, and at the same time see import growth cut in half last quarter. Normally, inventory adds are at least partly fuelled by purchases of foreign-made inputs. Not this time. Strip out inventories and the foreign trade sector, we see that domestic demand growth in the fourth quarter actually slowed to a paltry 1.7% annual rate from 2.3% in the third quarter. Some recovery. Based on some simulations we ran, demand growth with all the massive doses of fiscal and monetary stimulus should already be running in excess of a 10% annual rate. So, the real question that nobody seems to ask is why it is that underlying demand conditions are still so benign more than two years after the greatest stimulus of all time. The answer is that this epic credit collapse is a pervasive drain on spending and very likely has another five years to play out.
Third, if you believe the GDP data — remember, there are more revisions to come — then you de facto must be of the view that productivity growth is soaring at over a 6% annual rate. No doubt productivity is rising — just look at the never-ending slate of layoff announcements. But we came off a cycle with no technological advance and no capital deepening, so it is hard to believe that productivity at this time is growing at a pace that is four times the historical norm. Sorry, but we’re not buyers of that view. In the fourth quarter, aggregate private hours worked contracted at a 0.5% annual rate and what we can tell you is that such a decline in labour input has never before, scanning over 50 years of data, coincided with a GDP headline this good. Normally, GDP growth is 1.7% when hours worked is this weak, and that is exactly the trend that was depicted this week in the release of the Chicago Fed’s National Activity Index, which was widely ignored. On the flip side, when we have in the past seen GDP growth come in at or near a 5.7% annual rate, what is typical is that hours worked grows at a 3.7% rate. No matter how you slice it, the GDP number today represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker — a few grains won’t do.
Fourth, while the Chicago PMI and the revision to the University of Michigan consumer sentiment index also served up positive surprises, the “hard” data in terms of housing starts, home sales and consumer spending suggest that there is little, if any, momentum heading into early 2010. Moreover, the prospect that we see a discernible slowing in the pace of economic activity this quarter and a relapse in the second quarter is non trivial, in my view — by then, today’s flashy headline will be a distant memory.
Source: Gluskin Sheff