Back in May, I penned a missive entitled “If You Don’t Like It, Change It” which discussed the pending changes to the GDP calculation by the Bureau of Economic Analysis (BEA). To wit:
“Now, for all of you playing the home version of “Nail That GDP Number,” it was just a couple of years ago that the BEA decided that the economy was not growing fast enough and “tweaked” the GDP calculation and added in “intellectual property.” Those adjustments boosted GDP by some $500 million.
The problem with adding “intellectual property” is that the cost of a new cancer drug treatment, a Hollywood movie or a new hit song is already included in the value of product brought to market. In other words, since production is what drives economic growth, that value is captured in the quarterly analysis of business investment, spending, etc.
However, since those tweaks did not boost the economic growth rate as much as was hoped, the BEA has now wondered if maybe their statistical modeling is wrong and will be making adjustments once again to boost economic output in the U.S.”
The chart below shows both sets of adjustments to real, inflation-adjusted, GDP. As you will notice, despite the BEA’s previous adjustment, GDP growth was substantially weaker in subsequent years. However, you will also notice that the first two-quarters have seen a rather strong uptick in growth.
The latest adjustments to GDP changed the first quarter growth rate from a -0.9% to a positive 0.6% with the second quarter rising strongly to 2.3%. The problem is that the upward revisions to economic growth for the first half of this year does not particularly “jive” with what is happening in the “real economy.”
While the BEA is suggesting that previous weakness in the economy was simply due to “residual adjustments” lingering in the data, that does not explain the weakness in other areas of the economy.
The comedian Jeff Foxworthy used to have a bit in his stand-up routine called “You Might Be A Redneck If…”
Being from Texas I can personally attest to, unfortunately, having witnessed several of his comments. However, within the context of this missive and to illustrate my point, the following set of charts follow a similar theme:
“The Economy Probably Sucks If…”
Wages for 80% of workers are on the decline…
Core Durable Goods Orders are falling….
Core-Capex Orders are plunging…
(Note: Paul McCulley, the former legendary economist from PIMCO, used the following 3-month average of the annual change in core capex orders as a preferred indicator of the broader economy and how it would fare in the next few quarters ahead.)
Consumer Spending (almost 70% of the economy) is crumbling…
Corporate Revenues are contracting…
Charlie Bilello at Pension Partners made an important observation on this issue:
“What do General Motors, JPMorgan Chase, Microsoft, IBM, Proctor & Gamble, Citigroup, Johnson & Johnson, Coca-Cola, Oracle, and Caterpillar all have in common?
1) They are among a long list of S&P 500 companies with negative year-over-year revenue growth.
2) They are not in the Energy sector.
With 80% of companies already reported, S&P 500 sales are on pace to decline (year-over-year) by 3.1%, the second consecutive quarter of negative growth.”
Economic confidence (driven by Main Street) is decreasing…
While the majority of the media jumps on individual headline data points to support hopes of an ongoing economic revival, there is mounting evidence that suggests differently. In the short-term economics have very little to do with the direction of the market, and as such, are not helpful in portfolio management. However, in the long-term, economics and fundamentals do matter, and they tend to matter a lot.
As with the Federal Reserve, the economists that operate in the “ivory towers” of academia fail to grasp the disconnect between economic theory and Main Street reality. Just as with the idea that lower oil prices would drive consumption, economic theory continues to miss the clues of a heavily leveraged, low-wage growth and underemployed population.
What the data does suggest is while the BEA can change the methodology for calculating economic growth, a change in the “math” does not change the “reality.”
