First off, I think it is going to take a year or so to straighten out the
statistical mess building in the GDP accounts. Measured yr / yr,
the GDP price inflator advanced a paltry 1.9% through Q2 '08.
That compares to a 5.6% advance for the CPI. The use of the
modest deflator enables the BEA to show real growth over the
past year, which is unlikely with the CPI over 5%. So, at some
point, the Gov. will have to come cleaner on the data. This all
might await the departure of GWB and his crew.
So, we have a weak economy with housing development and
retail sales -- durables particularly -- the main culprits. Total
Gov. spending has been a slight positive offset. A bigger plus has
been good inventory management, with retail running an especially
tight ship. The biggest offset to a weak consumption / housing
picture has been the strong performance of export sales, which
has helped keep production and employment levels from falling
The shorter term lead indicators remain in firm, strong downtrends.
The longer term indicators have turned progressively more positive.
We have lower short rates, a positively sloped yield curve, a sharp
downward break in fuels prices and a Fed that is moving to add
monetary liquidity to the system, however gingerly. The longer lead
indicators are mediocre when it comes to timing, but my guess is
that a return to sustainable 3% real growth could be a good year out
in time. If commodities prices were to fall significantly further, this
would likely allow the Fed to speed up reliquifying the economy, and
would shorten the time frame for recovery worth the name.
The economy is deriving some benefit currently from the tax rebates.
The bulk of this program will have passed before very long, leaving
some vulnerability in its wake. In addition, with global growth
decelerating, the US export book will eventually reflect the global
The two vital elements I see are inflation and Federal Reserve
flexibility. The surge of inflation over the past year has punished the
economy. Wage growth has actually been slowing, so real take home
pay has been hit hard. A slow global economy needs to work to
suppress the commodities speculation party to relieve inflation
pressure on wages and profit margins. A hefty deceleration of the
inflation rate would allow for a recovery of real purchasing power, and
would further allow the Fed to operate more freely to open the spigot
I would have to say that the earnings estimates I see for late 2008
running through 2009 do look too high at present. But I suspect that
the big players in the stock market are making some allowance for
I rarely us the GDP accounts for macro analysis because of the wide
lattitude the White House uses in playing around with the price
deflators. These accounts can be helpful in looking over sector
comparative performance. I prefer the Fed's production series and
a host of monthly series, especially those that are privately sourced.
Ok. Enough of the big picture. Back to the grind for a spell.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!