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3 Things: Just The Weather, Deflator, Import Warning

  • Written by Syndicated Publisher No Comments Comments
    May 1, 2015

    The reason Wall Street, the IMF, the NBER, or any other agency have never predicted the onset of recession in the U.S. is simply due to willful blindness. The latest report on economic growth is a great example of this.

    While the majority of Wall Street economists had predicted that the first quarters GDP growth rate would be 1% or higher, I have repeatedly suggested that it would be closer to ZERO.  To wit:

    “Secondly, core CAPEX has been negative on a monthly basis for 6-consecutive months. Since 1992, there have only been 5-instances where core CAPEX orders have been negative for 4-or more consecutive months. The first three instances were leading indicators of future recessions. In 2012, there were 6-consecutive months of decline as the economy got very close to a recession but was saved by Central Bank interventions and the warmest winter in 65-year. The latest core CAPEX decline capped a second 6-month period as it appears that Q1 GDP will ring in close to zero.”

    Core-Capex-MoMChange-032615

    “I am not suggesting that the economy is about to slip into an immediate recession. However, I am suggesting that underlying economic strength in the U.S. is likely much weaker than headline statistics indicates.”

    Also Read: 4 Measures Warn Of Rising Recession Risk

    As we know now, the majority of Wall Street economists and analysts were wrong, as usual, as first quarter’s GDP rang in at just 0.2% growth.

    However, instead of recognizing the sluggishness in U.S. growth for what it is and has been, the Wall Street media machine begin to instantly provide excuses for the weak data print – “it was weather related.”

    The problem with the “weather excuse” is that temperatures were only “much below normal” in a relatively few states. The map below shows average temps across the U.S. for the 2014 winter period. Importantly, three of the most populous states – Texas, Florida, and California had normal to above normal temperatures for the winter period. But then again, maybe it was just “too hot” for shoppers as well.

    Temps-2014-15

    However, and importantly, this is why the Bureau of Economic Analysis “seasonally adjusts” the data to account for winter weather that tends to, surprisingly enough, happen during the winter.

    Lastly, let’s not forget that while economists are blaming the weather for weak first quarter GDP growth, they were also the ones that said GDP should get a boost from lower gas prices. So, assuming they right, then the savings from lower gas prices on a national basis should have offset any drag from weather related issues. Right? (Read this for why that didn’t happen.)

    It is important to remember that the reason that Wall Street and the media are always “optimistic” is because that is what creates revenue for them by keeping you invested. However, dismissing data points with overly simplistic excuses in order to support the “bullish thesis” will eventually lead excuses “why no one could have seen it coming.”

    There is mounting evidence that the economy is ACTUALLY slowing and weaker than headline statistics currently suggest. Furthermore, considering that the current economic expansion is already one of the longest in history, it is only logical that we could very likely be closer to the end of this particular cycle than not.

    While I am not suggesting that we are about to plunge into a recession, it is important that we pay attention to the underlying data trends. This is particularly the case since major stock market declines are historically coincident with the onset of recessionary drags.

    Deflating Deflator

    Speaking of “data trends,” Michael Lebowitz at 720 Global noted the very important, but receiving little attention, deflator in the most recent GDP release.

    “At -0.1%, the first quarter of 2015 marked only the third time in over 65 years the GDP Price Deflator has been negative. Additionally concerning, the trend in this indicator since 2000 has been downward sloping.”

    GDP-Price-Deflator-043015

    As noted in the chart above, peaks in the GDP deflator have been either coincident or leading indicators of economic weakness.

    Despite claims of “winter weather” being to blame for the latest slowdown in economic growth, the GDP deflator confirms that economic “strength” ended in 2010. Of course, since that time the economy has far underperformed economic expectations from EVERY economist and the Federal Reserve.

    Furthermore, the declining trend of the GDP deflator suggests that economic weakness will likely continue to confound lofty hopes of economic acceleration in the near future. Again, from Mr. Lebowitz:

    “Although the Federal Reserve referred to this evident deflation as ‘transitory’ in today’s FOMC meeting statement, the durable trend indicates otherwise.

    As highlighted in our prior analysis ‘The Humility of Rates and the Arrogance of Equities’, real GDP growth is also on a downward sloping trend. The combination of GDP and inflation falling in concert should heighten concerns for investors about the true state of the economy. The data suggests any near-term rebound toward what is historically believed to be trend growth is unlikely. With such disappointment in economic growth comes a challenging investment landscape.”

    Again, I repeat, in history the largest financial market corrections have been coincident with the onset of recessions. Just something worth remembering since by the time a recession is “recognized,” it will be far too late to do anything about it.

    Imports Tell A Story

    While much of the Q1 slump was attributed to weather related issues, one of the more telling points of the report, as it relates to real economic strength, was the plunge in imports. The reason is two fold:

    • The strong dollar makes imports cheaper which should have provided a boost to economic growth, and;
    • All those savings from cheap gas should have resulted in higher imports, but they didn’t.

    However, the slump in imports was not JUST a Q1 anomaly and is something that I have highlighted previously:

    “Note that both the annual rate of change in imports and exports have now moved into negative territory. Importantly, notice the extremely sharp decline in imports which suggests that despite lower gasoline prices, the contraction in domestic spending is much sharper than currently realized.

    However, as shown, when both imports and exports have contracted to negative levels previously it has been coincident with a recession.”

    Imports-Exports-Recessions-043015

    While the decline in imports was quickly dismissed by the media as a “weather” related event, there may be more to it than just that.

    The story that imports may be telling is of a consumer that has reached the limits of their disposable incomes due to surging healthcare costs and lack of income growth.

    While it is entirely likely that “economic bulls” will get a bounce in Q2 and Q3 due to pent-up demand from the previous two-quarters, the strength and sustainability of that bounce will be critically important. After all, in just a few short months, the cold breath of winter will once again be upon us.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of StreetTalk Live

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.
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