The following table shows the changes from the advance release (this is the Contributions to Percent Change in Real Gross Domestic Product).
The largest downward revisions were to the change in private inventories, imports, and non-residential structure investment. Personal consumption expenditures and investment in Equipment and software were revised up.
Advance
2nd Estimate (Revision)
Change
Percent change at annual rate:
Gross domestic product
2.4
1.6
-0.8
Percentage points at annual rates:
Personal consumption expenditures
1.15
1.38
0.23
Goods
0.79
0.82
0.03
Durable goods
0.53
0.49
-0.04
Nondurable goods
0.25
0.33
0.08
Services
0.36
0.56
0.20
Gross private domestic investment
3.14
2.75
-0.39
Fixed investment
2.09
2.12
0.03
Nonresidential
1.50
1.54
0.04
Structures
0.14
0.01
-0.13
Equipment and software
1.36
1.53
0.17
Residential
0.59
0.58
-0.01
Change in private inventories
1.05
0.63
-0.42
Net exports of goods and services
-2.78
-3.37
-0.59
Exports
1.22
1.08
-0.14
Imports
-4.00
-4.45
-0.45
Government consumption expenditures and gross investment
Error Correction: Sorry - I confused annual rates and quarterly rates.
Real GDP is 1.1% below the pre-recession peak, so if GDP would have to grow at 4.4% in Q3 the economy to be back to the pre-recession level.
Real PCE is 0.85% below the pre-recession peak, so PCE would have to grow at 3.4% in Q3 to be back to the pre-recession level. ________________________________________________________
These two graphs show the revisions for real GDP and PCE.
Click on graph for larger image in new window.
The recession was clearly worse than originally estimated (we suspected this already using Gross Domestic Income).
In fact real GDP in Q2 2010 was lower than originally reported for Q1 2010. And annualized real GDP is still 1.1% below the pre-recession peak. This means that real GDP would have to grow at a 4.3% rate over the next quarter to reach the recession peak.
"As of the first quarter of 2010, real GDP stands just shy of the 2008 second quarter level, so that growth of about 1.25 percent would be sufficient to allow real GDP to surpass the previous peak. At that point, the U.S. economy would be fully "recovered" from the very sharp downturn of late 2008 and early 2009. To be clear, the 1.25 percent is a quarterly number, and would be 5.0 percent at an annual rate. Although I think that 5.0 percent at an annual rate is too much to expect for current quarter real GDP growth, it seems like a reasonable possibility over the next two quarters combined. Given these conditions, I expect the U.S. recovery in GDP to be complete in the third quarter of this year."
I disagreed with him, and pointed out that GDI suggested downward revisions.
Real PCE was revised down even more.
Annualized real PCE is now 0.85% below the pre-recession peak, and would have to grow 3.4% over the next quarter to reach the previous peak.
[I]t may take years just to get back to the level of output we enjoyed in 2007, just before the economic crisis began.
If things go well, the economy will be back to pre-recession levels later this year or in 2011. No wonder there is so little investment. And no wonder there is so little hiring!
As everybody frets over a soft patch in the US economy and the backward looking Q2 GDP report today, the Chicago PMI for July came in at a very robust 62.3. A full 6 points above the 56 consensus and even 4 points above the most optimistic economist at 58.4. The markets initially sold off based on the GDP report, but some sanity has returned after the Chicago PMI. Actually the market is still
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.4 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.
A few key numbers:
"Real personal consumption expenditures increased 1.6 percent in the second quarter, compared with an increase of 1.9 percent in the first."
PCE is slowing.
Investment: Nonresidential structures increased 5.2 percent, in contrast to a decrease of 17.8 percent. Equipment and software increased 21.9 percent, compared with an increase of 20.4 percent. Real residential fixed investment increased 27.9 percent, in contrast to a decrease of 12.3 percent.
Residential investment was boosted by the tax credit and will decline in Q3.
"The change in real private inventories added 1.05 percentage points to the second-quarter changein real GDP after adding 2.64 percentage points to the first-quarter change."
That is probably the end of the inventory adjustment.
And here is a summary of the revisions:
Quarter
GDP
GDP Revised
Change
2007-I
1.2%
0.9%
-0.3%
2007-II
3.2%
3.2%
0.0%
2007-III
3.6%
2.3%
-1.3%
2007-IV
2.1%
2.9%
0.8%
2008-I
-0.7%
-0.7%
0.0%
2008-II
1.5%
0.6%
-0.9%
2008-III
-2.7%
-4.0%
-1.3%
2008-IV
-5.4%
-6.8%
-1.4%
2009-I
-6.4%
-4.9%
1.5%
2009-II
-0.7%
-0.7%
0.0%
2009-III
2.2%
1.6%
-0.6%
2009-IV
5.6%
5.0%
-0.6%
2010-I
2.7%
3.7%
1.0%
2010-II
2.4%
The recession was worse in 2008 than originally estimated.
Q1 2010 was revised up, but Q3 and Q4 2009 were revised down. So the recovery is a little weaker than originally estimated.
The Q1 real GDP rate was revised down again (third estimate) to 2.7% from the 2nd estimate of 3.0%.
Consumer spending was weaker in Q1 than originally estimated. PCE growth (personal consumption expenditures) was revised down to 3.0% in Q1 from the previous estimate of 3.5%.
... business spending, which only rose at a 2.2 percent rate instead of 3.1 percent as reported last month. This was as a spending on structures was revised down to show a slightly bigger decline than reported last month. Growth in software and equipment investment was also lowered to a 11.4 percent rate from 12.7 percent. ... Another drag on growth came from exports whose growth was eclipsed by a rise in imports, resulting in a trade deficit that subtracted from GDP.
... real final sales to domestic purchasers, considered a better measure of domestic demand, rose at a 1.6 percent rate instead of the 2.0 percent pace reported last month.
The "Change in private inventories" was revised up to a contribution of 1.88 percentage points from the previous estimate of 1.65. So inventory adjustment accounted for over two-thirds of the GDP growth in Q1 - and the inventory adjustment appears over. This is a weak third estimate.
FS: "Every so often, a reporter gets a glimpse of the enormous amount of behind-the-scenes craziness that goes on in advance of even the most mundane interview. Rarely, however, does it become public that an interview preparation session resulted in a flack storming out of the company, taking the CEO to arbitration, and eventually scoring a six-figure financial settlement. That’s what seems to have happened after eBay CEO Meg Whitman was unhappy with her PR person’s preparation for an interview with Adam Pasick of Reuters. Of course you want to know how the interview went..."
"Eric Cantor, Republican whip in the House of Representatives, talks to Edward Luce, Washington Bureau Chief, about how the US should tackle the fiscal crisis and criticises the Obama Administration on the way it is handling the BP oil spill "
JN: "The U.S. produces two conceptually identical official measures of its economic output, currently called Gross Domestic Product (GDP) and Gross Domestic Income (GDI). These two measures have shown markedly different business cycle fluctuations over the past twenty-five years, with GDI showing a more-pronounced cycle than GDP. The goal of this paper is to determine which measure better reflects the business cycle fluctuations in true output growth, and a broad range of results favor GDI. GDI currently shows the 2007-2009 downturn was considerably worse than is reflected in GDP."
Last night I excerpted from a speech by St Louis Fed President James Bullard. I noted that GDI might be more useful in measuring the recovery than GDP (they are conceptually equivalent).
As a followup to that post (and also to the previous post with the forecast from UCLA-Anderson's Ed Learmer), here are two graphs looking at payroll employment vs. the change in real GDP and real GDI.
At the bottom of this post are estimates of the unemployment rate in 12 months for several growth scenarios. Note: This is similar to Okun's relationship between GDP and unemployment.
Click on graph for larger image.
The first graph shows the four quarter change in real GDP vs. the four quarter change in employment, as a percent of payroll employment (to normalize for changes in payroll over time).
The second graph shows the same relationship, but uses Gross Domestic Income instead of GDP.
There is a clear relationship - the higher the change in the real GDP or real GDI, the larger the increase in payroll employment. The R2 for GDI is slightly higher than for GDP (0.80 vs. 0.74).
This shows that real GDP / real GDI has to grow at a sustained rate of about 1% just to keep the net change in payroll jobs at zero.
A 3% increase in real GDI (over a year) would lead to about a 1.4% increase in payroll employment. With approximately 130 million payroll jobs, a 1.4% increase in payroll employment would be just over 1.8 million jobs over the next year - and the unemployment rate would probably remain close to the current level (9.7%) depending on changes in population and the participation rate.
The following table summarizes several growth scenarios. The unemployment rate is from the household survey and depends on the number of people in the work force - so it cannot be calculated directly. The table uses a range of unemployment rates based on 1.6 to 2.1 million people entering the workforce over the next 12 months (a combination of population growth and discouraged workers reentering the work force).
NOTE: For those interested in understanding the differences between the household and establishment employment surveys - and why the unemployment rate cannot be calculated directly from the payroll report, see: Jobs and the Unemployment Rate
Real Growth
Percent Payroll Growth
Annual Payroll Growth (000s)
Monthly Payroll Growth (000s)
Unemployment Rate in One Year1
6.0%
3.6%
4648
387
7.6% to 7.9%
5.0%
2.9%
3718
310
8.2% to 8.5%
4.0%
2.1%
2787
232
8.8% to 9.1%
3.0%
1.4%
1857
155
9.4% to 9.7%
2.0%
0.7%
926
77
10.0% to 10.3%
1.0%
0.0%
-4
0
10.6% to 10.9%
1The unemployment rate is from the Household Survey and depends on several factors including changes in population and the participation rate.
Based on this table and Dr. Leamer's forecast of 3.4% GDP growth this year, and 2.4% in 2011, the unemployment rate would probably still be in the high 9s at the end of 2011.
I think Leamer is a little optimistic for 2010 - I'm expecting a 2nd half slowdown in GDP growth this year - and I think the unemployment rate will stay near the current level for some time.
MY: "The really striking facts... “of the 22 Chinese corporations listed on the Fortune Global 500, 21 are controlled by China’s central government or state-run banks.” The closest analogy it seems to me is probably to France... the western country to have been least-impacted by the neoliberal turn away from state ownership of firms. And somewhat like in France, the Chinese speak specifically about the idea that over the past thirty years their development has been enhanced by the creation of a better-educated better-trained bureaucracy and their aspirations to continue doing this in the future. By the lights of the American conventional wisdom, this whole situation seems mostly like a warning sign... though the prevailing policy consensus in the United States would lead you to believe that a country with France’s policies would necessarily be a basketcase, France is itself a very successful and prosperous nation and society."
DE: "CBO estimates that in the first quarter of calendar year 2010, ARRA’s policies: Raised the level of real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.2 percent, Lowered the unemployment rate by between 0.7 percentage points and 1.5 percentage points, Increased the number of people employed by between 1.2 million and 2.8 million, and Increased the number of full-time-equivalent (FTE) jobs by 1.8 million to 4.1 million compared with what those amounts would have been otherwise. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers.) The effects of ARRA on output and employment are expected to increase further during calendar year 2010 but then diminish in 2011 and fade away by the end of 2012."
Most of the revisions in the "Second Estimate" GDP report this morning were small; the headline GDP number was revised down to 3.0% from 3.2% (annualized real growth rate).
There are really two measures of GDP: 1) real GDP, and 2) real Gross Domestic Income (GDI). The BEA also released GDI today. Recent research suggests that GDI is often more accurate than GDP.
The U.S. produces two conceptually identical official measures of its economic output, currently called Gross Domestic Product (GDP) and Gross Domestic Income (GDI). These two measures have shown markedly different business cycle fluctuations over the past twenty five years, with GDI showing a more-pronounced cycle than GDP. These differences have become particularly glaring over the latest cyclical downturn, which appears considerably worse along several dimensions when looking at GDI. ...
In discussing the information content of these two sets of estimates, the confusion often starts with the nomenclature. GDP can mean either the true output variable of interest, or an estimate of that output variable based on the expenditure approach. Since these are two very different things, using “GDP” for both is confusing. Furthermore, since GDI has a different name than GDP, it may not be initially clear that GDI measures the same concept as GDP, using the equally valid income approach.
The NBER uses both real GDP and real GDI to date recessions.
The following graph is constructed as a percent of the previous peak in both GDP and GDI. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%. The recent recession is marked as ending in Q3 2009 - this is preliminary and NOT an NBER determination.
Click on graph for larger image in new window.
It appears that GDP bottomed in Q2 2009 and GDI in Q3 2009. Real GDP is only 1.2% below the pre-recession peak - but real GDI is still 2.3% below the previous peak.
GDI suggests the recovery has been more sluggish than the headline GDP report and better explains the weakness in the labor market.
Also "Personal income excluding current transfer receipts (billions of chained 2005 dollars)" was revised down for the last two quarters, and now shows essentially no growth in real personal income since the bottom of the recession.
The change in private inventories was smaller this quarter - adding 1.7% to GDP in Q1 2010 compared to 4.4% in Q4 2009. It is important to note that the inventory contribution to Q4 GDP was from a slowdown in the liquidation of inventories, but in Q1 businesses were building inventories - and this inventory build will probably slow in Q2.
As I noted earlier, the two leading sectors, residential investment (RI) and personal consumption expenditures (PCE), were mixed. RI declined to a new record low as percent of GDP, however PCE increased at a 3.6% real annualized rate.
The increase in PCE does not seem sustainable unless employment and incomes increase soon. A large portion of the increase in PCE came from a decrease in personal saving.
Click on graph for larger image in new window.
This graph shows personal saving as a percent of disposable personal income.
It is not unusual for the saving rate to decline at the beginning of a recovery as people become more confident. This helps drive consumer spending, but with the high levels of household debt, I expect the saving rate to increase over the rest of the year.
Here are some Q1 numbers (all annualized):
Personal consumption expenditures (PCE) increased $130.7 billion
Personal saving declined $88.5 billion.
Government social benefits to persons increased $61.1 billion.
So the boost in PCE came from the decline in saving and the increase in benefits. That is not sustainable.
The second graph shows real personal income less transfer payments as a percent of the previous peak.
Unlike the recovery in GDP, real personal income less transfer payments has barely increased and is still 6.6% below the pre-recession level.
The peak of the stimulus spending is in Q2 2010 (right now), and then the stimulus spending starts to taper off in the 2nd half of 2010. So underlying demand better increase soon - and that means jobs and incomes going forward.
Unfortunately residential investment is usually one of the key engines for employment and growth at the beginning of a recovery - and I expect RI to be sluggish all year because of the huge overhang of existing housing units. So my guess is the recovery will probably remain sluggish, and I still expect a slowdown in the 2nd half of 2010.
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.2 percent in the first quarter of 2010, (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. ... The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, and nonresidential fixed investment that were partly offset by decreases in state and local government spending and in residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased. ... Real personal consumption expenditures increased 3.6 percent in the first quarter ... Real nonresidential fixed investment increased 4.1 percent ... Real residential fixed investment decreased 10.9 percent ...
The two leading sectors, residential investment (RI) and personal consumption expenditures (PCE), moved in different directions in Q1:
PCE increased at a 3.6% annualized growth rate compared to 1.6% in Q4. PCE was driven by a decline in the savings rate to 3.1% (from 3.9%) and transfer payments (I'll have more on this).
RI declined 10.9% in Q1, compared to an increase of 3.8% in Q4.
Click on graph for larger image in new window.
This graphs shows Residential investment (RI) as a percent of GDP since 1947.
RI as a percent of GDP is at a new record low. And there is no reason to expect a sustained increase in RI until the excess housing inventory is absorbed.
Notice that RI usually recovers very quickly coming out of a recession. This time RI is moving sideways - not a good sign for a robust recovery in 2010.
This graph shows the real GDP declines from the prior peak for post WWII recessions.
The recent recession was the worst since WWII (the peak decline was 3.83% in Q2 2009).
Even after three quarters of growth, current GDP is still 1.2% below the prior peak in real terms. For a "V-shaped" recovery, GDP would already be close to previous highs - and GDP has performed better than most other indicators. The recovery has been modest-to-moderate so far, and if growth continues at this pace (I think it will slow), it will take a couple more quarters to return to the pre-recession peak in real GDP.
I'll have some more on GDP and investment later ...
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 5.6 percent in the fourth quarter of 2009 ... Real personal consumption expenditures increased 1.6 percent in the fourth quarter.
The headline GDP number was revised down to 5.6% annualized growth in Q4 (from 5.9%). The following table shows the changes from the "advance estimate" to the "second estimate" to the "third estimate" for several key categories:
Advance
Second Estimate
Third Estimate
GDP
5.7%
5.9%
5.6%
PCE
2.0%
1.7%
1.6%
Residential Investment
5.7%
5.0%
3.8%
Structures
-15.4%
-13.9%
-18.0%
Equipment & Software
13.3%
18.2%
19.0%
Note that PCE and Residential Investment (RI) - the two leading categories - were both revised down for Q4. This suggests that final demand was weaker in Q4 than in the previous two estimates.
The headline GDP number was revised up to 5.9% annualized growth in Q4 (from 5.7%), however most of the improvement in the revision came from changes in private inventories. Excluding inventory changes, GDP would have been revised down to around 1.9% from 2.2%.
This table shows the changes from the "advance estimate" to the "second estimate" for several key categories:
Advance
Second Estimate
GDP
5.7%
5.9%
PCE
2.0%
1.7%
Residential Investment
5.7%
5.0%
Structures
-15.4%
-13.9%
Equipment & Software
13.3%
18.2%
Note that PCE and Residential Investment (RI) - the two leading categories - were both revised down in Q4.
Changes in private inventories are transitory (only lasts a few quarters at the start of a recovery), and although the headline number was revised up, final demand was weaker than in the advance estimate.
Brad DeLong observes that the FY2011 budget features "big, very big" tightening on the revenue and spending sides (2.5% of GDP "from 2010 to 2011") for the prevailing labor market conditions. DeLong wants his "morning in America" (don't we all?), and is understandably alarmed at the pessimistic forecast of the rate of labor market improvement. Paul Krugman echoes the sentiment on "near-term" fiscal tightening.
As is always the case, the tightening question has to be "relative to what?" [1] Receipts as a fraction of GDP are expected to increase fairly substantially, for example, but that's largely a consequence of expected economic growth.
Compared to the current-policy baseline, the FY 2011 (10/2010-9/2011) budget increases the FY 2011 deficit by around 0.8 percent of GDP. In FY 2012, the budget would subtract around 0.7 percent of GDP from the current-policy deficit. Krugman is correct to attribute this to the winding-down of ARRA stimulus and of our "overseas contingency operations" better known as the wars in Iraq and Afghanistan. Go see Table S-2 here [PDF]. Additionally, current policy has some stimulus on top of current law. Allowing most of the Bush tax cuts to become permanent reduces FY 2011 receipts by around 0.9 percent of GDP. (See Table 14-2, here.)
As for the timing, the budget assumes (see Table 2-1) that real GDP in quarter 4 of calendar year 2010 will be 3 percent higher year-over-year; in Q4 of 2011 (a/k/a Q1 of FY 2012), real GDP is expected to increase another 4.3 percent. Even with the tightening, Q4 2012 real GDP would increase another 4.3 percent y/y. So the FY 2012 tightening only arrives after two years of modest growth.
If measures labeled as such are actually to be temporary economic stimulus measures, they obviously must end sometime. Ending them after the expansion ends is stupid — the tightening would reinforce the subsequent downturn — so it's going to take some steam out of the expansion one way or another. The most pressing timing concern would be not to take away the stimulus before it's clear that the recent GDP growth is sustainable; I'd argue that after two years of growth, should we get there, the case that measured GDP growth is a matter of one-time shots and/or statistical glitches will be fairly weak.
The slow assumed labor market recovery Brad DeLong notes might be seen as a mirror-image of the GDP recovery assumed in the budget baseline:
The budget's baseline economy (with the triangle marks) isn't as pessimistic as OMB is willing to imagine in public (and if you're Ken Houghton, you might see all of these as irrationally exuberant), but the 'output gap' opened by the recession is assumed to close very slowly. While higher-frequency data are not equally optimistic, there's building evidence (so far, outside of employment) for a reasonably strong recovery. And as Maynard explains at Creative Destruction, it's arguably in the administration's interest to err on the pessimistic side since people (again, even including some economists) don't understand counterfactuals and thus tend to inappropriately place blame (or credit) for surprises.
[1] Every economics professor who disparages the "jobs created or saved" concept should be immediately stripped of tenure and exposed to the current labor market for forgetting that all economic analysis is counterfactual.
The following graph shows the rolling 4 quarter contribution to GDP from residential investment, equipment and software, and nonresidential structures. This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.
Click on graph for larger image in new window.
Residential Investment (RI) has made a positive contribution to GDP the last two quarters, and the rolling four quarter change is moving up.
Equipment and software investment made a small positive contribution to GDP in Q3, and a larger contribution in Q4. The four quarter average is also moving up.
As expected, nonresidential investment in structures is now declining sharply as major projects are completed. The economy will recover long before nonresidential investment in structures recovers.
And as always, residential investment is the best leading indicator for the economy.
This is an update to a graph I posted in early 2009 ...
Click on graph for larger image in new window.
This graph shows the real GDP declines from the prior peak for post WWII recessions.
The recent recession was the worst since WWII (the peak decline was 3.83% in Q2 2009).
Even after the strong GDP growth in Q4 (due to inventory changes), current GDP is still 1.9% below the prior peak in real terms. If the recovery is sluggish - as I expect - it will take several more quarters to return to the pre-recession peak in real GDP.
Any analysis of the Q4 GDP report has to start with the change in private inventories. This change contributed a majority of the increase in GDP, and annualized Q4 GDP growth would have been 2.3% without the transitory increase from inventory changes.
Unfortunately - although expected - the two leading sectors, residential investment (RI) and personal consumption expenditures (PCE), both slowed in Q4.
PCE slowed from 2.8% annualized growth in Q3 to 2.0% in Q4.
It is not a surprise that both key leading sectors are struggling. The personal saving rate increased slightly to 4.6% in Q4, and I expect the saving rate to increase over the next year or two to around 8% - as households repair their balance sheets - and that will be a constant drag on PCE.
And there is no reason to expect a sustained increase in RI until the excess housing inventory is absorbed. In fact, based on recent reports of housing starts and new home sales, there is a good chance that residential investment will be a slight drag on GDP in Q1 2010.
Click on graph for larger image in new window.
This graphs shows Residential investment (RI) as a percent of GDP since 1947.
RI had declined for 14 consecutive quarters before the increase in Q3 2009. The Q4 report puts RI as a percent of GDP at just over 2.5%, barely above the record low - since WWII - set in Q2 2009.
Notice that RI usually recovers very quickly coming out of a recession. This time RI is moving sideways - not a good sign for a robust recovery in 2010.
The second graph shows non-residential investment as a percent of GDP.
Business investment in equipment and software increased 13.3% (annualized). This is a good sign, but continued investment probably depends on increases in underlying demand.
Investment in non-residential structures was only off 15.4% (annualized) and will probably be revised down (this has happened for the last few quarters). I expect non-residential investment in structures to continue to decline sharply over the next several quarters. In previous downturns the economy recovered long before nonresidential investment in structures recovered - and that will probably be true again this time.
When the supplemental data is released, I'll post graphs of investment in retail, offices, and hotels, and a breakdown of residential investment.
The transitory boost from inventory changes is frequently a great kick start to the economy at the beginning of a recovery - as long as the leading sectors (PCE and RI) are also picking up. This report has to be viewed as concerning ... and is reminiscent of Q1 1981 and Q1 2002 ... both examples of inventory changes making large contributions to GDP, but underlying growth remained weak.
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. ... The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, increased.
The acceleration in real GDP in the fourth quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and an upturn in nonresidential fixed investment that were partly offset by decelerations in federal government spending and in PCE. ... Real personal consumption expenditures increased 2.0 percent in the fourth quarter, compared with an increase of 2.8 percent in the third. ... Real nonresidential fixed investment increased 2.9 percent in the fourth quarter, in contrast to a decrease of 5.9 percent in the third. Nonresidential structures decreased 15.4 percent, compared with a decrease of 18.4 percent. Equipment and software increased 13.3 percent, compared with an increase of 1.5 percent. Real residential fixed investment increased 5.7 percent, compared with an increase of 18.9 percent.
This is very close to my expectations and shows a fairly weak economy (real PCE increase 2.0%). The question is: what happens in 2010?
I'll have some more on GDP and investment later ...
In a research note released last night, Goldman Sachs raised their estimate of Q4 GDP from 4.0% to 5.8%. They cautioned that the "headline will be an eye-popper", but that this growth is mostly due to inventory changes: "More than two-thirds of our estimated increase comes from a sudden stabilization in inventories". They also noted "anything between 4½% and 7% is possible given the volatility of the inventory data".
The rest of the note cautions on 2010, and Goldman still sees sluggish growth of just under 2.0% with the unemployment rate peaking in early 2011.
This is what we've been discussing - GDP boosted by inventory changes in the 2nd half of 2009, followed by sluggish growth in 2010.
I expect the biggest source of expansion in the second half of this year to come from a diminished pace of inventory liquidation by manufacturers, wholesalers, and retailers. Such a pattern is typical of business cycles. Inventory investment often is the catalyst for economic recoveries. True, the boost is usually fairly short-lived, but it can be quite important in getting things going. ...
But what if this doesn't "get things going"?
When was the last time we saw 5%+ GDP growth, due mostly to inventory changes, and increasing unemployment? It was in Q1 1981.
The 1980 recession ended in Q3 1980, and inventory changes boosted Q4 GDP by 3.8%, and Q1 1981 GDP by an amazing 6.4%! However underlying demand remained weak (as defined by GDP ex-inventory changes, and PCE) as shown in the following table:
1980-IV
1981-I
1981-II
2009-III
2009-IV1
GDP
7.6%
8.6%
-3.2%
2.2%
5.8%est
GDP ex-Inventory Changes
3.8%
2.2%
0.8%
1.5%
2.0%est
PCE
3.4%
1.5%
0.0%
2.0%
1.7%est
Change in Unemployment Rate
-0.3%
0.2%
0.1%
0.3%
0.2%
Look at the blue period, and notice the boost in GDP from inventory changes in the Q4 1980, and Q1 1981. But PCE was only 1.5% in Q1 1980, and fell to 0.0% in Q2 1980. Since there was no pickup in underlying demand, the economy slid back into recession in July 1981.
Now the causes of the current recession are very different from the early '80s, but once again we are seeing a transitory boost from inventory changes and underlying demand remains weak. With the huge overhang of existing home inventory and record rental vacancies, and the ongoing repair of household balance sheets, I expect underlying demand to remain weak in 2010.
The blip in the 2nd half from inventory changes was expected, and I expect Q4 to be the best quarter for GDP for some time.
1 Q4 2009 is estimated. GDP is from Goldman Sachs, and ex-inventory and PCE is from my own estimate.
Yesterday's most recent data from the Conference Board's Confidence Index recapitulates very well the Economic Inquisition purgatory that living in America has become: pain and suffering now, coupled with the promise of salvation and financial bliss at some point in the future. Of course, on a long enough timeline we are all dead, so it is only fitting that the administration, whose slogan had something to do with tangible change, is gradually encroaching on the Catholic Church's turf in an all out war for the souls of America's taxpayers as tangible becomes increasingly ephemeral and, well, intangible (save for unemployment and the wads of electronic cash deposited in Goldman Sachs' employees bank accounts - both of those are all too real). While the CBCC number came in at about the expected reading of 52.9 (from 50.6 in November), all of the "improvement" in confidence came from rosy future expectations, which rose to a two year high of 75.6 (from 70.3 previously).As for the present: current conditions plunged to another record low of 18.8. Never before has the differential between present pain and future hope been so wide.
The impact of this divergence politically is all too obvious. The voting population, which has been extremely patient, and keeps hoping that the future will finally bring something better and in line with oh so many promises, may very soon change their mood and realize that the present is here to stay, regardless of what the Fed manipulated capital markets demonstrate. When that happens watch for some interesting election fireworks on this side of the Potomac river.
Reading between the lines of the CBCC indicates that Obama and CNBC's grand plan to get consumers to spend, spend, spend again has fizzled. Autobuying intentions dropped to 3.8 from 4.5 in November, the lowest read in over a year, when the SAAR was 10.5 million. The double dip in the auto sales will soon be upon us. Furthermore, buying intentions of major household appliances held at a weak 23.7: Cash for Bidets can't come fast enough. Most troubling, however, homebuying intentions have plunged to a near-thirty year low: at 1.9, the percentage of Americans planning on buying a house is the lowest since 1982.
And just in case you thought that shellshocked US citizens will look to get the hell out of Dodge, at least temporarily, to take advantage of that strong, strong dollar and travel abroad, think again. The percentage of Americans planning a vacation in the next six months fell to 35.7, the lowest since April. The David Rosenberg-penned "frugal consumer" is here to stay, which can only mean that both the Fed and the US Government will become buyers of first, last and everything inbetween resort, as the traditional component of US GDP (sorry David Bianco, you are unabashedly wrong in your "consumer is irrelevant" propaganda). Maybe it is time to dust off all those Russian Politics 101 manuals, in our search of how to defeat Soviet Style Communist fiscal and monetary policy, which have so thoroughly penetrated the United States of America itself.
2010 will be a year of major transformations, punctuated by the following key escalating divergence: i) on one hand, the ongoing contraction of the US consumer will accelerate, because even as the stock market ramps ever higher (and on ever decreasing trade volume a 2,000 level on the S&P while completely incredulous, is attainable, but will benefit only a select few insiders who continue selling their stock at ridiculous valuations), household wealth will at best stagnate (as a reminder, an increase in interest rates "withdraws" much more household net worth, due to implied house price reduction, than any comparable boost to the S&P can offset), ii) on the other hand, China, which is faced with the ticking timebomb of continuing the status quo and hoping that US consumers can keep growing the global economy, or alternatively, looking inward at its own consumer class, and shifting away from its historical export-led model. The one unavoidable side effect of this prominent departure would be a renminbi appreciation, and a logical drop in the US currency, once the US-China peg if lifted (a theme opposed recently by SocGen's Albert Edwards, who sees the inverse as likely occurring). The main question for 2010 and beyond is whether this will be a gradual decline or a disorderly drop. And behind the scenes of all the bickering, jawboning and posturing, this is precisely what high level officials from both the US and China are currently negotiating. This will be one of the major themes that defines the next decade. Another phrase to describe this process is the gradual drift of US into a nation that is aware it is no longer the primary economic dynamo of global growth as China eagerly steps in to fill that spot.
Looking at the aftermath of the financial crisis, the two major consequences that will define US economic trends for an extended period of time, are the increasingly more frugal US consumer, whose savings rate is likely to increase gradually to the long-term low double digit average, and an ongoing outflow from equities into safer assets such as municipals, bonds and loans, as the maturing baby-boomers finds the volatility of the engineered equity market far too risky as they enter retirement age.
So with US consumption-led growth entering its twilight days, courtesy of assets that simply do not provide the kinds of returns that allowed for a savings-free lifestyle, what does this mean for Asia, and China in particular? Bank of America provides a good and succinct overview of the major historical themes that have defined Asian economics, and what the next decade will likely bring.
The essence of the Asian development strategy is to build manufacturing capacity for global demand. High savings rates allowed the needed investment in plants and infrastructure to be financed domestically. This strategy was pioneered by Japan in the 1950s and 60s, copied by the Asian “Tigers” (Hong Kong, Korea, Singapore, and Taiwan) in the 70s and 80s, and by a host of other Asian countries in the 80s and 90s. What changed the game was China’s adoption of the same strategy. Exports have increased nearly sixfold since China joined the World Trade Organization (WTO) in 2001. This had a profound impact on the global economy – but it had an even more profound impact on the China’s own economy and labor market. We estimate that 150 million Chinese workers joined the global labor force and began producing internationally traded goods. (As a contrast, the US labor force is 154 million people.)
The integration of China’s vast workforce into the global economy is what tipped the balance. The transfer of jobs and production from the US, where personal and corporate savings rates were low, to China, where savings rates were high, gave rise to huge imbalances. Within a few years after WTO entry, China’s current account surplus became the world’s largest, mirrored by an even larger US deficit.
Currency appreciation would have reduced wages, profits, and the flow of savings, but China was unwilling to allow market forces to play out. Thus, thePBoC (China’s central bank) intervened in unprecedented amounts, and the vast flow of Chinese savings was channeled abroad in the form of foreign exchange reserves – mostly short-duration government debt and bank deposits. Essentially, China was financing its own exports by purchasing short-term debt. The bulk ofthat found its way into US markets, keeping interest rates low and setting the stage for the housing bubble.
And herein lies the rub:
The financial crisis delivered a clear verdict, in our view, on the limits to the Asian growth model. It no longer makes sense to pursue double-digit growth by lending cheaply to the US consumer.
Yet change would require less reserve accumulation or – put another way – allowing the currency to appreciate against the US dollar, to which it is now effectively pegged. China needs to manage this “exit” carefully. Moving too fast risks a dollar crisis, with a disorderly drop in the US dollar and a spike in US bond yields. Moving too slow risks a boom-bust cycle in China, with capital inflows and strong monetary growth rates putting upward pressure on asset prices and inflation.
As noted earlier, the transitioning from the status quo, which worked for many years, but is now no longer relevant for the PBoC, will be likely even more critical than Bernanke's decision on when to finally begin raising rates. Because while the latter is mostly concerned with asset-price inflation (and stoking it every chance he gets), the Chinese decision will determine not only interest-rate policy for the US for decades to come, but will decide how soon the US should prepare to accept the consolation prize of first runner up in the global economic leader category. While on an absolute basis the US Economy is still a clear outlier, the rate of growth exhibited by China makes it a virtual guarantee that the days for US economic hegemony are numbered (even more so with GDP determination which is whatever the Central Committee says it is). The only open question is when will China decide it is finally time to shift away from the export-led growth model to one which prefers its own consumers as the source of growth. This transition will likely be of historical importance: just as the inception of the US vassal relationship with China lead to a historic and unprecedented boom in household net worth, doubling to $60 trillion in the span of a decade, so shall the unwind have a comparable impact to the downside.
It is merely this moment that Bernanke and the administration are doing all they can to prolong as much as possible. Alas it may be too late, as China seems to have finally realized that in the global prisoner's dilemma game, it has taken the constant US defections for far too long enough. And with the benefits of perpetuating the charade at this point outweighed by the detriments, 2010 could just be the year when China decides it has had enough.
For much more observations on the US-China relationship, and what lies in store for both the dollar and the renminbi, below is the most recent China FX roadmap analysis from BofA.
I noted that GDP growth in Q3 and Q4 weren't in question because of a transitory boost from changes in private inventories and from stimulus spending.
Here is a repeat of the graph showing the contributions to GDP from changes in private inventories for the last several recessions. The blue shaded area is the last two quarters of each recession, and the light area is the first four quarters of each recovery.
Click on graph for larger image in new window.
The Red line is the median of the last 5 recessions - and indicates about a 2% contribution to GDP from changes in inventories, for each of the first two quarters coming out of a recession.
The key is this boost is transitory.
Last quarter I thought a 1% to 2% contribution from changes in inventories was possible. The actual contribution was 0.69%. I suspect that changes in inventories will add more to Q4; probably closer to 2%.
I also thought Personal Consumption Expenditures (PCE) would be fairly strong in Q3, especially because of the cash-for-clunkers program. My guess was "3% PCE growth in Q3, and that would mean a contribution to GDP of about 2%." The final numbers were 2.8% and a contribution of 1.96%.
The following graph shows real Personal Consumption Expenditures (PCE) through November 2009 (in 2005 dollars). Note that the y-axis doesn't start at zero to better show the change.
The quarterly change in PCE is based on the change from the average in one quarter, compared to the average of the preceding quarter.
The colored rectangles show the quarters, and the blue bars are the real monthly PCE.
Using the "two-month method" for estimating Q4 PCE growth gives an estimate of just under 1%. However - note that PCE in August was distorted by the cash-for-clunkers program (and that impacts the two-month method). So my guess is PCE growth in Q4 will be around 1.7% or a contribution to GDP of 1.2% or so. (less than the growth in Q3).
As I've noted, residential investment has been moving sideways, although that will show up more in Q1 2010 than in Q4. So we can add in a positive contributions from net exports, some increase in residential investment (although smaller than in Q3), an increase in equipment and software investment - and subtract out investment in non-residential structures - and Q4 should look pretty healthy.
In a reserach note this week, Ed McKelvey at Goldman Sachs called the 2nd half "ho-hum":
"At a time of the year when ho-ho-ho is the catchword, the first six months of the US economic recovery look distinctly ho-hum following the latest reports. ... Although we continue to estimate a 4% growth rate for the fourth quarter, with upside risk to that figure, the composition of this growth is not strong. Almost half of it comes from a sharp slowing in the rate at which inventories are being drawn down ..."
And it is probably a good time to repeat this graph from economy.com's Mark Zandi suggesting the greatest impact from the stimulus package is now behind us.
This suggests that all of the growth in Q3 was due to the stimulus package (and then some), and the impact is now waning - only 2% in Q4, and 1.5% in Q1 2010 - and then the impact on GDP growth will be negative in the 2nd half of 2010.
As "ho-hum" as the 2nd half of 2009 was, I expect GDP growth to be more sluggish in 2010 for the following reasons:
Most of the increase from changes in private inventories will be behind us - although it could slip into Q1 2010, but without a pickup in end demand, the boost will end soon.
Because of the huge overhang of vacant housing units, I expect any increase from residential investment to be muted.
I expect the personal saving rate to increase over the next year - leading to slow PCE growth.
Non-residential investment in structures will be a drag throughout 2010.
And as I noted last quarter, on the plus side, exports might continue to provide a boost.
So I still think GDP growth will be sluggish in 2010, with downside risks.
Ethanol producers sue California to prevent low-carbon fuel restrictions. (Corn shortage forces greens to start to eating their own young?) [wall street journal]
Latvia attempts to lower pension benefits to avoid fiscal meltdown. Courts: "Denied." Latvian PM: "We will just go bankrupt if we observe all legal norms" (Sufficiently satirical comeback fails me) [baltic reports]
Increase in pension contribution requirement for NY Teachers causes rush to lock in old rates. (Officials shocked, shocked to find that rational actors avoid taxes) [wall street journal]
Retailers extend Christmas hours to boost traffic. (Losing money for every open hour, but making it up on volume) [bloomberg]
Dubai's Burj Dubai tower about to open as world's tallest building [in foreclosure?] (Maybe. Obama inspired transparency in government initiative forbids exact height disclosure) [reuters]
FinCEN proposes sharing bank data with foreign officials. (KGB a/k/a "Goldman Sachs (Moscow)" to reopen economic espionage desk, install Rezident in Manhattan) [reuters]
Japan's budget includes $484 billion deficit. 200% Debt:GDP just around the corner. (Obama: "Only $484 billion? You fail at fiat, Hatoyama.") [reuters]
China revises energy per GDP unit use down to 5.2% 2007-2008. (Keynes resurrected! Taxpayer funded government stimulus double counts growth, single counts energy use) [financial times]
Anyone looking at their 401(k) portfolio performance since the end of August will undoubtedly be very happy (and extremely surprised), as the market has climbed steadily higher despite i) increasingly declining trading volume and ii) consistent and material withdrawals from domestic equity mutual funds. Furthermore, if anyone was merely looking at the trading action in regular hours, one would think there was absolutely no profit made since early September. The reason for that: all the upside since September 14th has come exclusively from after hours action. The chart below demonstrates the relative performance of regular hour trading in the SPY as well as that in the extended session. The notable observations: gaps, gaps, gaps. Every single day, minimal volume pushes the futures index higher. Good news, bad news, it don't matter to the Goldman S&P and Russell 1000 futures desk: they just lift every micro offer, giving the impression that the market is unstoppable, often leapfrogging each other as the latest viagra'ed GDP or unemployment rumor is spread. Come morning, it is time for the HFT brigade to come in and scalp their trillions of pennies while leaving the market unchanged, then at 4pm handing it off again to leveraged futures manipulation and dark pools. In a nutshell, this is the secret of the past quarter's phenomenal market performance.
A longer-term chart highlights the regime changes since the March lows, when for several months in a row, regular hours would carry the broader market higher, then would flatline, and let the futures trading desks take over. Rinse. Repeat. That way both the HFTs and dark pools end up happy.
The observant among you will immediately realize what this implies: not only is there no volume breadth to the recent move in the markets, but the actual push higher likely occurs on at most tens of thousands of futures contracts on a daily/weekly basis. The fact that literally several blocks of AH trades, used persistently, can move the market higher by 6% over the past 3 months, even as regular trading accounts for absolutely no part of this move, and that the SEC finds nothing troubling about this phenomenon, should be sufficiently telling about how "efficient" US markets have become.
The reason for this focus away from regular hours trading is simple: all After Hours does is provide leverage due to the much shallower trading overnight. Zero Hedge is currently finalizing ES volume data to determine just what leverage the futures desk as JPM and Goldman uses in their interminable push to make the Dow 36,000, working title of "EV/EBITDA = Infinity (Or Better Yet, Negative)? Who Gives A Shit: The Fed Has You Covered", the bestseller it was always meant to be.
Like a buzzing mosquito inside the netting over your bed, wings on the heavy Mustique air, humming a small pinhole of bright light through the dark veil of your dreams of unbridled success, we have been annoyed by the constant propensity of even learned economists to measure the performance of equity markets in nominal terms. "Worst decade for stocks since [horrific period marker]!" is only the most egregious (not necessarily the most common) offender in this respect. In truth, we have long failed to see the logic of measuring performance in nominal terms (our sporadic gold denominated S&P 500 posts are a good example).
In the long run, performance matters only if it increases wealth, and it makes little sense to speak of wealth unless it is relative to purchasing power. To ignore this little point would elevate, say, Weimar fund managers circa 1923 to levels that would make Soros look like Scotsman Capital's Vince Farrell. Let us then undertake together a brief adventure in the measuring of real, rather than nominal performance.
Today, in a preview of a much larger Zero Hedge project on all the CPI components, we offer the S&P 500 index since 1980 denominated in four individual CPI components with annotated starting and ending values:
Or, in layman's terms, you are fat, Vitamin C deficient1, sick2, and uneducated3, but well indoctrinated4.
We couldn't have planned this better. Now watch some commercials and get out there and buy some consumer goods. We have GDP numbers to revise.
1. Not Seasonally Adjusted, U.S. city average, Oranges, including tangerines, Base Period: 1982-84=100
2. Seasonally Adjusted, U.S. city average, Prescription drugs, Base Period: 1982-84=100
3. Seasonally Adjusted, U.S. city average, College tuition and fees, Base Period: 1982-84=100
4. Not Seasonally Adjusted, U.S. city average, Televisions, Base Period: 1982-84=100 - corrected to reflect correct series ending datapoint of 1095.63
This was a much larger than normal revision for the third pass on a given quarter, knocking what once was a fairly robust 3.5% bounce down to a mediocre 2.2% (from 2.8% prior to this revision). All sectors except the trade balance -- a focal point of last month's downgrade -- saw some downward revision. Revisions were particularly deep in business investment -- to -5.9% from -4.1%, worth two tenths of the revision -- and in inventories (also worth nearly two tenths).
That would be those sectors that should, one would think, be among the easiest to count in the first place, especially on the second try.
Goldman is being very kind here. Goldman started off the day with this from GS Breakfast Bytes:
GDP for Q3 (third estimate)... not much change, though risks lie to the downside. GS: +2.8%; median forecast (of 73): +2.8%, ranging from +2.5% to +3.7%; last (Q3 second estimate) +2.8%. The third cut on a given quarter does not usually produce much of a change in the growth estimate. In this case, the risks against our assumption of no change lie to the downside, reflecting large downward revisions to construction spending for August and September. Like many others, we do not see a meaningful probability of changes in the +0.5% estimate for the GDP price index or the +1.3% figure for the core PCE price index. (Emphasis ours).
It is difficult to get a more direct sense for how much mind share government bailouts (and government figures) have managed to command. That even the most pessimistic member of the "consensus" (n=73) managed to overshoot the mark by nearly 14% and the average sailed full speed into a 27% pop-up should remind us of three things:
The Bureau of Economic Analysis of the United States Department of Commerce has ceased to be (if it ever was) a reliable outlet for economic data. (Be this the result of misfeasance or malfeasance depends on the reader's propensity to credit conspiracy theory).
That what passes for the professional prognosticator class these days is pathologically incapable of realistic appraisal.
That the largest single expression of a Keynesian "injection" in the history of Keynesians or injections (or the planet) struggled to create even the most anemic growth. Net the double counting of stimulus funds it seems difficult to imagine even a remotely encouraging (or positive) "growth" figure could be tortured out of the economic realities that would be so plain if one but looked out the window to forecast them.
If it isn't clear to everyone by this time that the United States remains firmly in the grips of a massive "shadow recession," then we can only credit this ignorance with some unshakable and deeply rooted form of denial or a seriously reckless case of willful blindness. Either way, we would like to commend the current powers that be for their tour de force performance in establishing themselves firmly both as the most masterful of bullshit artists to occupy the beltway (and that's saying something) and simply the most economically inept (and expensive) team ever to hold national office. The risk adjusted returns on this particular ruling clique would make the pre-dollarization Zimbabwe carry trade look attractive.
If there is a silver lining to be found here it is probably that this little experiment might finally drive a splintered wooden stake through the heart of John Maynard Keynes' ghost (or at least irradiate Paul Krugman's ravings to within 50 rads of his professional life).
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.2 percent in the third quarter of 2009 ...
GDP was revised down from the advance estimated of 3.5% to the preliminary estimate of 2.8%, and now to 2.2%.
Personal consumption expenditures (PCE) were revised down to 2.8% from 2.9%.
And investment in nonresidential structures was revised down to -18.4% from -15.1% (aka falling off a cliff).
A list which contains both some quite interesting swans and turkeys:
1. There is a glaring upside to first-quarter 2010 corporate profits (up 100% year over year) and first-quarter 2010 GDP (up 4.5%). It grows clear that, owing to continued draconian cost cuts, coupled with a series of positive economic releases and a long list of company profit guidance increases in mid to late January and early February, there is a very large upside to first-quarter GDP (up 4.5%) and, even more important, to S&P profit growth (which doubles!). The upside on both counts is in sharp contrast to more muted growth expectations. While corporate managers, economists and strategists raise earnings per share, full-year growth and S&P target estimates, surprisingly, the U.S. equity market fails to respond positively to the much better growth dynamic, and the S&P 500 remains tightly range-bound (between 1,050 and 1,150) into spring 2010. 2. Housing and jobs fail to revive. An outsized first-quarter 2010 GDP (up 4.5.%) print is achieved despite a still moribund housing market and without any meaningful improvement in the labor market (excluding the increase in census workers) as corporations continue to cut costs and show little commitment to adding permanent employees. 3. The U.S. dollar explodes higher. After dropping by over 40% from 2001 to 2008, the U.S. dollar continued to spiral lower in the last nine months of 2009. Our currency's recent strength will persist, however, surprising most market participants by continuing to rally into first quarter 2010. In fact, the U.S. dollar will be the strongest major world currency during the first three or four months of the new year. 4. The price of gold topples. Gold's price plummets to $900 an ounce by the beginning of second quarter 2010. Unhedged, publicly held gold companies report large losses, and the gold sector lies at the bottom of all major sector performers. Hedge fund manager John Paulson abandons his plan to bring a new dedicated gold hedge fund to market. 5. Central banks tighten earlier than expected. China, facing reported inflation approaching 5%, tightens monetary and fiscal policy in March, a month ahead of a Fed tightening of 50 basis points, which, with the benefit of hindsight, is a policy mistake. 6. A Middle East peace is upended due to an attack by Israel on Iran. Israel attacks Iran's nuclear facilities before midyear. An already comatose U.S. consumer falls back on its heels, retail spending plummets, and the personal savings rate approaches 10%. The first-quarter spike in domestic growth is short-lived as GDP abruptly stalls. 7. Stocks drop by 10% in the first half of next year. In the face of renewed geopolitical tensions and reduced worldwide growth expectations, stocks drop as the threat of an economic double-dip grows. Surprisingly, though, the drop in the major indices is contained, and the U.S. stock market retreats by less than 10% from year-end 2009 levels. 8. Goldman Sachs goes private. Goldman Sachs (GS) stock drops back to $125 to $130 a share, within $15 of the warrant exercise price that Warren Buffett received in Berkshire Hathaway's (BRK.A) late 2008 investment in Goldman Sachs. Sick of the unrelenting compensation outcry, government jawboning and associated populist pressures, Warren Buffett teams up with Goldman Sachs to take the investment firm private. The deal is completed by year-end. 9. Second-half 2010 GDP growth turns flat. The Goldman Sachs transaction stabilizes the markets, which are stunned by an extended Mideast conflict that continues throughout the summer and into the early fall. While a diplomatic initiative led by the U.S. serves to calm Mideast tensions, flat second-half U.S. GDP growth and a still high 9.5% to 10.0% unemployment rate caps the U.S. stock market's upside and leads to a very dull second half, during which share prices have virtually flatlined (with surprisingly limited rallies and corrections throughout the entire six-month period). For the full year, the S&P 500 exhibits a 10% decline vs. the general consensus of leading strategists for about a 10% rise in the major indices. 10. Rate-sensitive stocks outperform; metals underperform. Utilities are the best performing sector in the U.S. stock market in 2010; gold stocks are the worst performing group, with consumer discretionary coming in as a close second. 11. Treasury yields fall. The yield of the 10-year U.S. note drops from 4% at the end of the first quarter to under 3% by the summer and ends the year at approximately the same level (3%). Despite the current consensus that higher inflation and interest rates will weigh on the fixed-income markets, bonds surprisingly outperform stocks in 2010. A plethora of specialized domestic and non-U.S. fixed-income exchange-traded funds are introduced throughout the year, setting the stage for a vast speculative top in bond prices, but that is a late 2011 issue. 12. Warren Buffett steps down. Warren Buffett announces that he is handing over the investment reins to a Berkshire outsider and that he plans to also announce his in-house successor as chief operating officer by Berkshire Hathaway annual meeting in 2011. 13. Insider trading charges expand. The SEC alleges, in a broad-ranging sting, the existence of extensive exchange of information that goes well beyond Galleon's Silicon Valley executive connections. Several well-known long-only mutual funds are implicated in the sting, which reveals that they have consistently received privileged information from some of the largest public companies over the past decade. 14. The SEC launches an assault on mutual fund expenses. The SEC restricts 12b-1 mutual fund fees. In response to the proposal, asset management stocks crater. 15. The SEC restricts short-selling. The SEC announces major short-selling bans after stocks sag in the second quarter. 16. More hedge fund tumult emerges. Two of the most successful hedge fund managers extant announce their retirement and fund closures. One exits based on performance problems, the other based on legal problems. 17. Pandit is out and Cohen is in at Citigroup. Citigroup's Vikram Pandit is replaced by former Shearson Lehman Brothers Chairman Peter Cohen. Cohen replaces a number of senior Citigroup executives with Ramius Partners colleagues. Sandy Weill rejoins Citigroup as a senior consultant. 18. A weakened Republican party is in disarray. Sarah Palin announces that she has separated from her husband, leaving the Republican party firmly in the hands of former Massachusetts Governor Mitt Romney. An improving economy in early 2010 elevates President Obama's popularity back to pre-inauguration levels, and, despite the market's second-quarter decline, the country comes together after the Middle East conflict, producing a tidal wave of populism that moves ever more dramatically in legislation and spirit. With the Democratic tsunami (part deux) revived, the party wins November midterm elections by a landslide. 19. Tiger Woods makes a comeback. Tiger Woods and his wife reconcile in early 2010, and he returns earlier than expected to the PGA Tour. After announcing that his wife is pregnant with their third child, both the PGA Tour's and Tiger Woods' popularity rise to record levels, and the golfer signs a series of new commercial contracts that insure him a record $150 million of endorsement income in 2011. 20. The New York Yankees are sold to a Jack Welch-led investor group. The Steinbrenner family decides, for estate purposes, to sell the New York Yankees to a group headed by former General Electric (GE) Chairman Jack Welch.
Obama emerges triumphantly from negotiations in Copenhagen having secured a 2 degree cap on world temperature. Of course, this implies a sea level increase limit of seven to nine meters. Having successfully commanded the tide to remain out, Obama and the United Nations have broken new ground in assuring climate status quo through international agreement. (Oh, and several programs directed at the mass redistribution of wealth to non-democratic kleptocracies were also outlined in the lobby during intermission cocktails).
Enforcement hasn't been discussed yet, but we are confident that a "Weather Czar" will be appointed to gauge world temperature compliance and levy world GDP bonus clawbacks in the event the limit is breached by the planet. Further, though the summit failed to fail to reach a non-binding consensus, it does provide the basis for hope that emissions targets will be re-aligned to newly developed targets for emissions targets. John Kerry expressed confidence that new targets for targets would be realized sometime when it wasn't quite so cold outside, and pointed out that the appointment of a Czar and involvement of the EPA would eliminate the need for any legislative authorization to clawback world bonuses in any year where global temperatures exceeded the mandatory limit. No word yet on how the clawbacks would be used, but speculation includes the Administration's new "polar bears saved or created" programs.
Unfortunately, Obama will be forced to leave the Global Warming Conference due to an imposing winter storm bearing down on the mid-atlantic and due to dump as much as twenty inches of snow in the nation's capitol, which may, in turn, delay the arrival in Washington, D.C. of the largest carbon footprinted transportation logistics infrastructure on the planet. Obama will therefore be unable to attend the final vote on the motion that the next conference will be in the South of France in August.
