Tomorrow the BEA will release it's advance estimate for GDP in the 2nd quarter (2010 Q-II). The consensus calls for a 2.5% annual growth rate from April through June, led by business spending.
Business spending on equipment and software, however, is projected to contribute heavily to growth. Thanks to super profit growth, large corporations have the cash to spend while cost cutting during the recession has triggered a need to upgrade equipment.
The capital-spending picture was sketched out by Wednesday's data on durable goods. Although total new orders unexpectedly fell 1.0% in June, the category dealing with business spending—non-defense capital goods excluding aircraft—rose 0.6%. Read more on durable goods.
Shipments of capital goods -- the measure that goes into the GDP calculations -- grew at an annual rate of 15.8% in the second quarter, says Jay Feldman, director of economics at Credit Suisse.
"Business investment remains the bright spot in an otherwise dull economic outlook," says Feldman.
That's the spin, but let's get back to reality. If the advance GDP number is 2% or greater, we'll be told that the economy is experiencing "moderate growth" and there's nothing to worry about. If the number comes in below 2%, we will be told the economy is experiencing "disappointing but continued moderate growth" and there's nothing to worry about—yet.
Very likely, the advance estimate has no where to go but down. The advance first quarter estimate (2010 Q-I) started out at 3.2%, which made everybody happy. That number was subsequently revised down twice, first down to 3.0%, with the final number coming in at 2.7%. Unfortunately, only wonks like me wait around to see what the final number turns out to be.
There are numerous indicators telling us the economy is slowing down, including declining retail sales, slumping durable goods orders, the growing trade deficit, historically low new & existing home sales, slumping new home construction, the end of the inventory rebuild (which accounted for 2/3rds of the 2010 QI increase), spending cutbacks at the State and local levels, higher personal savings rates, the dwindling fiscal stimulus, three consecutive months of deflation in the CPI, etc.
You get the picture. For all that, tomorrow's GDP number is likely to be another cause for celebration among Administration officials, accommodating economists and hopeless optimists. Unless the number is really terrible, it can hardly be otherwise.
Rick Davis of the Consumer Metrics Institute (CMI) has a different perspective on how the economy is doing. In fact, he is somewhat alarmed, as am I. CMI carries out daily, real-time measurements of on-line consumer demand for discretionary durable goods. The results are shown in his Daily Growth Index (DGI), aka. the Contraction Watch.
The Contraction Watch. The blue line indicates a fairly steady (and now accelerating) decline in the Daily Growth Index starting about 190 days ago (mid January of this year). The observed 2008 data (red line) and 2006 data (green line) are shown for comparison. This is not Good News.
Rick explains how this relates to GDP.
Our Daily Growth Index reflects the strength of consumer demand over the trailing 91-day 'quarter', weighted according to the contribution that goods involved in on-line transactions make to the GDP (per the BEA's NIPA tables). It is designed to serve as a proxy for a 'real-time' GDP, and it slipped into net contraction on January 15th, 2010. To put this decline in perspective we offer the following observations:
- The current contraction in consumer demand for discretionary durable goods has now extended for more than 6 months.
- The day to day level of the year-over-year contraction is now worse than a similar reading of the 'Great Recession' of 2008 was after 6 months.
I first discussed the CMI alternative view of reality in my post GDP — Do We Have Walking Pneumonia? The DGI proxy for GDP predicted that 2010 Q-I would show a growth rate of 2.62%. After the 2nd revision, BEA's final number was 2.7%. Not bad!
But wait, it gets better. In an e-mail, Rick offered me some further guidance, which I will pass along to you. Here it is, suitably edited—
First of all, I am dead certain about what consumers are (or are not) doing. We measure that in a timely manner with accuracy and reliability. I'm not shy about saying what those numbers are telling us.
My problem is that I can't say the same for the BEA's GDP, for several reasons:
[lists reasons A.1-A.5, technical stuff pertaining to why the GDP measurement is flawed (e.g. inventory measurements), differences between the DGI and GDP]
To be brutally honest:
- We are certain that consumer demand on November 30, 2009 was growing at a 2.62% year-over-year rate. That demand should have flowed to factories during the first quarter of 2010.
- The BEA benefited from utter and blind luck to get that close to the correct number. A full 2/3 of their number came from factories unwittingly growing inventory in anticipation of soaring demand during the summer (we're waiting for the other shoe to drop when factories draw down inventories in the third quarter).
How about that for hubris? We're right, and the BEA was lucky to match our number?
It may be hubris, but I do like it! So what does the Daily Growth Index predict 2nd and 3rd quarter GDP will be?
If the GDP lags our Daily Growth Index by the (insanely consistent) 123 days it has lagged on average over the past 3 quarters, the numbers will be:
- 2nd Quarter (2010 Q-II) = -1.57% (ends 6/30/2010, corresponds to Daily Growth Index on 2/27/2010)
- 3rd Quarter (2010 Q-III) = -1.93% (ends 9/30/2010, corresponds to Daily Growth Index on 5/30/2010)
I fully expect to have people calling for my scalp when the BEA misses those numbers, getting them wrong because of the items (A.1-A.5) listed above. C'est la vie.
But what do I ACTUALLY expect? Probably flat for the second quarter (net after inventory), but with the inventory reversals killing the number just 4 days before the mid-term elections.
If Rick is right, and he's got a pretty good track record, GDP for the quarter just past will be flat (at best) after all the revisions are in. But better worse yet, the advance GDP estimate for 2010 Q-III, which will come out just 4 days before the midterm elections, is going to really suck (perhaps a contraction of 2%). That should really stir things up in a world in which the sacred GDP number means everything.
The truly sad thing about the Contraction Watch is obviously the event itself. Rick and the rest of us are literally watching the de-leveraging process at work, wherein a society whose economy ran on easy credit and asset bubbles is now painfully going through withdrawal in an attempt to to get clean. We're like junkies at a Betty Ford Center for alcoholics credit addicts. We have to learn to live without the stimulus. This is why I do not and will not tolerate sanguine fantasies about our economic future.