An unexpected increase in auto production last quarter was a statistical fluke that will be reversed, making current U.S. economic growth even weaker, according to a former Commerce Department economist. Last quarter's annualized 26 percent increase in auto production shocked Joe Carson, now director of economic research at AllianceBernstein LP in New York. Without the gain, the economy would have grown at an annual rate of 0.9 percent, not the 1.6 percent the Commerce Department reported today. The increase in output came despite cutbacks announced by General Motors Corp., Ford Motor Co. and others. A drop in the wholesale price of SUVs and light trucks as the automakers cleared leftover 2006 models made production look stronger than it actually was, said Carson. The economic fallout from the auto-industry cutbacks will instead come this quarter, he said. ``Last quarter was weak even with the benefit of this mismatch and the fourth quarter will now also be weak because it's going the other way,'' Carson said. ``Whatever output you have this quarter, which will probably be down, will be discounted by a likely rebound in prices.'' The mismatch can be explained by looking at how the government adjusts the figures for price changes. Commerce Department economists use wholesale light truck prices, from the Labor Department's producer price report, to eliminate the influence of inflation on investment and inventories for that category. A 5.5 percent drop in price of SUVs and other light trucks last quarter made output look stronger when adjusted for inflation. Growth Pessimism ``Whatever output you have this quarter, which will probably be down, will be discounted by a likely rebound in prices,'' Carson said. He currently forecasts the U.S. economy will grow at an annual rate of 1.4 percent this quarter and said he wouldn't be surprised if growth came in at half that pace. AllianceBernstein is an asset management firm. The median forecast of economists surveyed by Bloomberg News earlier this month was for fourth-quarter growth of 2.5 percent. ``We are looking into it to see if we can better understand the reasons for the large decline'' in prices, said Brent Moulton, associate director for national economic accounts at the Bureau of Economic Analysis, part of the Commerce Department, which produces the report on gross domestic product. Carson wasn't the only economist shocked by the auto- production figures. `Unbelievable Detail' Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, called the output numbers ``the most unbelievable detail'' in the GDP report. The composition of growth last quarter, which included an unexpectedly large accumulation of inventories, also prompted other economists to reduce estimates for fourth-quarter growth. An increase in inventories overall suggests manufacturers may need to trim production this quarter. The economy will probably grow at an annual pace of 1 percent from October through December, down almost a full percentage point from his earlier estimate, according to Joseph LaVorgna, chief U.S. fixed income economist at Deutsche Bank Securities Inc. in New York. ``A relatively large inventory build last quarter will need to be worked off and that will produce a negative hit to production, employment and income,'' LaVorgna added. To contact the reporter on this story: Carlos Torres in Washington at ctorres2@bloomberg.net http://www.bloomberg.com/apps/news?pid=20601087&sid=aF5My4Z6jHiY&refer=home
Fantastic article. The fact that this solid info isn't being widely discussed leads me to believe Wall Street simply is sweeping terrible news under the rug, in a very intentional manner.
The usual motive for Wall Street - to keep the money flowing and the accounts churning. Between this horrid GDP figure, Walmart's same store sales' data, the pace of new car sales, and the housing meltdown, a stronger case can be made for a very hard landing than not.
Interesting. I'm fairly new to the game so I'm always loving to hear viewpoints of more experienced players in the game. Thanks!!!
Here's another article I just came across - yep, it's from a bear, but his data is defensible on its face: http://usmarket.seekingalpha.com/article/19503 Actual GDP Even Worse Than Reported Posted on Oct 30th, 2006 Barry Ritholtz submits: Don't pay attention to the statistically aberrant GDP number reported Friday. It's actually much worse. Thanks to a "statistical fluke," GDP was actually less than 1%: "Last quarter's annualized 26 percent increase in auto production shocked Joe Carson, now director of economic research at AllianceBernstein LP in New York. Without the gain, the economy would have grown at an annual rate of 0.9 percent, not the 1.6 percent the Commerce Department reported today. The increase in output came despite cutbacks announced by General Motors Corp., Ford Motor Co. and others. A drop in the wholesale price of SUVs and light trucks as the automakers cleared leftover 2006 models made production look stronger than it actually was, said Carson. The economic fallout from the auto-industry cutbacks will instead come this quarter, he said." What brought this aberrational data point about? The number crunchers in the Commerce Department rely on wholesale prices for light trucks. The 5.5% decrease in SUVs had the effect of making output look stronger -- but only when adjusted for inflation. In reality, these were firesales to move product off the lot. Consider this related tidbit: AutoNation, the largest dealership and sellers of new cars in the country, said it expects to cut 2007 purchases from the big 3 by 30%. And its not just cars: WalMart reported its weakest monthly sales gains since December 2000 -- despite the 30 decrease in gasoline prices since the summer. In the US, Sales rose just 0.5% -- significantly below the 2-to-4% improvement originally forecast for October. Bottom line: If we have to torture the data to get to just 1.6% GDP, imagine what is actually going on in the economy. This is the primary reason we have "obsessed" so much on Real Estate. Without the massive contribution of residential housing to the overall economy -- from job creation to transactional business to MEW -- there simply is not a whole lot of growth to be found elsewhere. Other noteworthy items in the Q3 GDP report: There was an unexpectedly large accumulation of inventories. This implies manufacturing output will slow further in Q4, as manufacturers trim production this quarter to reduce the increased inventory build up. Also of note: The GDP Deflator came in at 1.8%, significantly below the expected 2.8%. When it appears we have less inflation, then output looks greater. The deflator has not been below 2% since Q2 2003. In case you were wondering, the deflator is not ex-energy. For the econ-wonks out there, the Technical notes are always rich with intrigue, and this report is no different: For many of the key series used to prepare the advance estimate of GDP, including retail sales, unit automobile and truck sales and inventories, manufacturers' shipments of nondefense capital goods (other than aircraft), manufacturers' inventories of durable goods, federal defense spending, and consumer, producer, and international price indexes, actual data are available for all months of the quarter. For the key series shown in this table, actual data for the third month of the quarter usually are not available in time for inclusion in the advance GDP estimate. BEA makes assumptions for the source data that are not yet available; assumptions for September 2006 are shown in the last column of the table. For most series shown, the data for August are preliminary and subject to further revision. Occasionally, the data for earlier months are also subject to revision." This assumptions/estimates is what typically happens for the first GDP release (remember, the number will get reported 3 times: this Advance GDP, Prelim, and then Final). What this could mean is that by the time the subsequent revisions are completed , we could be showing zero growth. That's right, 0% GDP is in the range of possible Q3 outcomes (I suspect we will be in 0.5%-1% range)