David A. Rosenberg April 30, 2010
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
U.S. GDP REVIEW — ONCE AGAIN, LESS THAN MEETS THE EYE
While many economists will undoubtedly rejoice over the strongest headline GDP results in six years, today’s Q1 2010 number actually came in a tad light relatively to expectations, not to mention the fact that it was a very mixed performance, from a sector standpoint. Real GDP expanded at a 3.2% annual rate versus the 3.4% rate that the consensus had penned in, and once again the mathematics of a renewed inventory build was responsible for half the GDP growth last quarter.
No doubt the consumer was in a better buying mood in Q1 with volume spending up 3.6% annual rate but if truth be told, if not for the drawdown in the savings rate (to 3.1% from 3.9%) household expenditures would have barely exceeded a 2.5% annualized pace. The savings drawdown, along with the fact that real personal income excluding government transfers basically stagnated in the first quarter, leaves us with a view that this rebound in consumer spending growth was more of a blip than a sustainable uptrend.
Capital spending (equipment and software) was a bright light in the GDP report, expanding at 13.4% annual rate on top of the 19% pickup in the final three months of 2009. Considering that whatever organic income growth the economy is generating is being concentrated in the corporate sector, along with the fact that a tremendous amount of capacity has been taken out of the system over the past two years in the manufacturing sector, it should really come as no surprise that business spending is firming up.
Unfortunately, capex only represents a 6.5% share of GDP and there are other areas of the economy that are contracting and thereby exerting an offsetting impact. The relentless overcapacity in the commercial real estate sector continues to wreak havoc, underscored by the 14% decline in non-residential construction last quarter. On top of this, residential construction swung back to a contraction of 11% at an annual rate, which makes you wonder about the outlook after the homebuyer tax credit expires.
The fiscal crunch in the State and local government sector prompted the largest downsizing in any quarter (down 3.8 % at an annual rate, the largest quarterly decline in three decades). For all the talk about “shovel-ready” infrastructure projects, federal expenditures (nondefense) actually slowed to a 1.7% annual rate, leaving the entire government sector as an overall drag on GDP. This may be the early signs of fading stimulus, which will only be extenuated by the reduction in government support programs going forward (the expiry of jobless benefits, as one example).
We have may have a statistical recovery on our hands, but it is extremely anaemic benchmarked against the amount of pro-cyclical government assistance ranging from bailouts to a microscopic policy rate, to a $1.4 trillion fiscal deficit, to a pregnant $2.3 trillion Federal Reserve balance sheet.
If this were a normal, garden-variety cycle, as opposed to a secular period of unrelenting private sector credit-contraction, the various Federal government interventions would have already been triggering a rebound in real final sales growth closer to a 3.1% annual rate. Instead, real final sales (GDP less inventories) has only managed to eek out gains of 1.5%, 1.7%, 1.6% in each of the past 3 quarters. On this basis, this post-recession recovery goes down as one of the weakest in the 60-plus year history of the data series.
Not only that, but it is still completely abnormal for the economy to still be running at a level below the pre-recession peak at this stage of the cycle. Normally, nine quarters after the onset of the downturn, the level of real GDP is not only hitting a new high, but 12% above the prior cycle high. Here were are today, nine quarters after the onset of the “Great Recession” and despite all the kings horses and all the kings men, the Humpty Dumpty economy is still 1% lower today that it was in the fourth quarter of 2007.
ONE AMAZING RALLY, BUT ...
• The S&P 500 is now up 76% from the March 2009 lows. This goes down as the sharpest up-move since the bungee jump in 1932-33 (no money was made in equities for another decade after this initial sharp leg up).
• The S&P 500 index has not had a three-day losing streak since mid-January. This has not happened since 1980 (the market didn’t bottom for good for another two years).
• Up days versus down days in 2010 is now at 66% — the highest ratio during any year in over 30 years.
• The ratio of NYSE volume to Nasdaq volume (sign of speculation) is surging beyond levels seen during any period in the past 10 years.
• Investors Intelligence bullishness hit 54% in the latest week — its highest level since the 2007 all-time peak in the equity averages.
But ... there are at least four nonconfirmations.
First is the gold price — it is trending higher in U.S. dollar terms and surging in Euro terms and is a hedge against financial instability. Meanwhile, the stock market is trading as if we have financial nirvana on our hands.
Second is the bond market — a hedge against deflation and here we still have the 10-year T-note yield hanging around 3.7% whereas if we were truly in a wonderful reflationary cycle, it should be north of 4.5% right now.
Third, the action in emerging Asian markets, which are trading below their recent highs, and especially China, which is actually now 14% below the nearby peak of late 2009 (during which the S&P 500 has risen nearly 10%).
Fourth, there are some signs of a crack in credit quality. Global corporate spreads have widened 6bps this week, to 149bps and high-yield spreads have moved out 13bps, to 569bps. U.S. CDS spreads have also risen 5bps, to 94bps. As we saw in 2000 and again in 2007, credit leads equities.
LAND OF THE RISING SUN?
We said earlier this year that Japan was a “sleeper” (and we know Byron Wien would concur) and overnight the country printed off a slate of consructive data points. Industrial production bounced 0.4% in March, wages rose 0.8% YoY for the first increase in 22 months and real household spending jumped 4.4%. Consumer spending in Japan — wasn’t that an oxymoron for the past two decades? Ostensibly, not the case any more.
CHINA: THE GOLDEN TOUCH?
In a recent report, the World Gold Council expects China (currently the second largest consumer of gold in the world at US$14bln) to double gold consumption over the next decade. The Chinese gold market has taken off since government regulation was eased in 2002 — over the past five years, consumer demand for gold has averaged 10% per year. In fact, even with strong growth over the past five years, on a per capita basis the Chinese still lag behind India, Hong Kong and Saudi Arabia in terms of gold consumption, so there is a lot of scope for catch up.
In 2009, which was a down year for jewelry demand overall, China bucked this trend with 9% growth. Early reports suggest that 2010 is already shaping up to be good year for jewelry demand — both Indian and Chinese demand for gold jewelry were noted to have increased in the first quarter.
CANADIAN LABOUR MARKET — MAYBE NOT AS PRISTINE AS THOUGHT
Canada’s other employment report came out yesterday (the Establishment Survey, which is not widely followed since it is reported with a nearly two-month lag to the Labour Force Survey). There was some food for thought in the report, which suggested that the Canadian labour market is not quite as strong as widely believed. For example, from the end of Canada’s recession, the LFS survey reported that the economy created nearly 85,000 jobs while the Establishment Survey reported almost half of that increase, at 46,000.
Q&A WITH BoC GOVERNOR MARK CARNEY
Bank of Canada Governor Mark Carney appeared before the Standing Senate Committee on Banking, Trade and Commerce. There was nothing new in his speech, as it was identical to the one he delivered to The House of Commons Standing Committee on Finance on Tuesday. However, the Q&A period did catch our attention and here’s what Mr. Carney had to say on a variety of topics:
On Canada’s outlook vis-à-vis sovereign risk
“The net result of this would be negative for growth in Canada, and being central bankers, we've wrapped this all up neatly into a reference to a downside risk to our forecast from sovereign risk.”
On Greece
“We have been in close discussions with our European partners, with the IMF, with the countries concerned. There are negotiations ongoing. At this stage, it's a serious situation. But these are productive negotiations and they're continuing to make progress and we have expectation that they will be fulfilled.”
On the main risk to global recovery
“The debt situation is one of the largest, arguably the largest, risk to securing the global recovery.”
On the idea of global bank tax
“We look at that as, well, first off, good luck hanging onto the funds and not diverting it off to something else. And secondly, isn't this going to change behaviour in the sector because I know that you're going to rush in with that big pot of money and bail me out. "This seems like a very foolish idea and so we want no part of that.”
On the danger of not fixing fiscal problems
“The situation is serious and to fully answer your question ... what happens if these steps aren't taken ... If they're not taken one can expect an increase in longer-term interest rates on the global level and even though the Canadian fiscal position is among the best if not the best of the G20, jointly the best I guess with Australia, we will do better than others but we will be pulled up by the rising global interest rates and that will have a knock-on effect on investment and growth in this country.”
On fiscal stimulus limits
“There are limits to fiscal stimulus. There's requirements and there's been clear messages sent from the market to a number of countries, to all of us really, that we need to be on sustainable paths. If that's the only thing that happens in our view, if the only thing that happens is a series of countries respond as they should to these messages, tighten policy, fiscal policy, move ... back more rapidly onto sustainable paths, the world is in some risk of arriving in a situation of insufficient demand ... this is one of our two big downside risks. The first is the Canadian dollar, the second is this dynamic.”
On bank capital
“The question for the system as a whole, including Canada, is what should this new minimum be and should it also be higher than it is currently in Canada, including in the quality of that capital. There are some merits to thinking about further strengthening of the capital regime in this country as well.”
INITIAL CLAIMS – LOOKING PAST THE NOISE
U.S. initial jobless claims fell 11k to 448K for the week of April 24, basically in-line with consensus expectations. Recent claims data have been volatile due to the Easter holiday and administrative problems, but if you look past the noise, claims have remained around the 450K level for the past 8-9 weeks. Continuing claims fell 18K, to 4.645 million, the second consecutive weekly decline — but again, aside from the recent volatility, continuing claims have been stuck around 4.65 million.
The U.S. labour market doesn’t seem to be showing great improvement given that both initial and continuing claims appear to be stuck at levels seen two months ago. Note that the reference week for nonfarm payrolls (due next Friday) was last week’s claims report, so we haven’t seen much of a change to the 175K consensus estimate after this report.
BENEFITS ABOUT TO EXPIRE
Personal income has managed to rise 2% in the past year in the United States despite a near-10% jobless rate and the fact that employment, even with the nascent rebound, is still down nearly 2% over the last 12 months. Fully 100% of the income gain in the household sector has been due to government transfer payments, which now account for almost one-fifth — by far a record — of household income.
Private sector wages and salaries are still lower today than they were a year ago and real organic personal income is down nearly 2% as well. This is why there is still debate as to when and whether the recession has actually come to a full stop — imagine a recovery devoid of organic income growth in the consumer sector.
What is driving the income growth has been the surge in unemployment insurance benefits, which have ballooned to unprecedented levels and are up more than 50% from this time last year. So, Uncle Sam’s generosity has been a key player and this is largely because no fewer than three times since the recession began in December 2007, Congress has extended jobless benefits — from 53 weeks to 99 weeks (about double what you can get in “socialist” Canada). But this assistance is about to term out and with it, an estimated one million folks receiving benefits are going to roll off in the next few months (there are now an amazing 11 million or 70% of the jobless tally receiving benefits). Considering that this means the loss of $320 per week, on average, for these one million jobless who are about to see their benefits expire, we are talking about a $16 billion hit to their pocketbooks. So the biggest mistake anyone can make is to extrapolate today’s consumer-led GDP report into the future.
Source: http://www.gluskinsheff.com/us-intl/