31 January 2010

The recovery is here! Or is it? Real recovery or statistical recovery?

1. The statistical landscape
  • US growth accelerated during 4th quarter expanding at a 5.7% yearly rate over the previous quarter, its fastest pace since the third quarter of 2003, when the economy grew at a rate of 6.9 %. This was a rather pleasant surprise. Sounds nice, but looking at more closely at the numbers, all is not so nice: the evil is in the details.
3.7% of the growth came from inventory rebuilding vs. 0.7% during the third quarter. Inventories grew for two main reasons: (1) restocking ahead of the holiday season and (2) inventories were below sales after the sharp adjustment of Q4 08 and the first 9 months of 2009. It has to be seen whether next quarters will see a continuing and significant rebuilding of inventories; since I am skeptical about a substantial improvement in employment numbers next year, and therefore consumption, I am doubtful and this will weigh on GDP growth.
Consumer spending, which comprises about 70% of the economy, rose at an annualized pace of 2% in the fourth quarter, after an increase of 2.8% in the third quarter: better than I feared but not great and too low to inspire confidence for companies to increase inventories and hire again.

  • These graphs show hat the US economy (and Europe is hardly different) grew out of Government spending during most of the year (cash for clunkers and other stimulus measures) and more recently from exports. The private sector remains mostly idle however, and without it you will not have any sound and sustainable recovery.
  • On the employment front, the economy lost 208,000 nonfarm payroll jobs last quarter, and the unemployment rate is well entrenched in the double digit number (from 10% to 17% depending of the scope of the calculation for the unemployment rate). As long as the labor market remains weak, consumers will be reluctant to spend money.
2. So, recovery or not?

The graphs below show that:
  • Real income is not improving and well outside the lowest limit of the historical band after the economic peak
  • Unemployment remain high and shows no sign of a real improvement that would spur confidence, then consumption an the economy
  • Retail sales during the Christmas season were not good and remain alongside the lowest limit of the band.

David Rosenberg conducted a thorough analysis of these numbers and pointed out:
  • Imports fell during the 4th quarter which (1) added to the GDP (imports are deducted from GDP) and (2) is inconsistent with an inventory- rebuilding cycle.
  • Domestic demand slowed to a 1.7% annual rate during Q4 09 vs. 2.3% during Q3, when stripping out inventories and the foreign trade sector.
  • The GDP data are the first estimates (advance report) and will be reviewed once for each of the two coming months. Q3 figures were eventually revised down to 2.2% from 3.5%; the largest surprise came from domestic demand revised down to 2.3% from 2.7%.
In addition, banks are still not lending (we are not far from the -20% mark compared the peak reached in 2008), in particular to small and mid-size companies, the ones that usually create jobs. The same is true in Europe, according to the ECB's quarterly bank lending survey as reported by the Wall Street Journal.


The Government stimulus did its job to stabilize the financial and economic situation, but there is no sign of significant recovery in the job market which will be key. In the current environment, I do not see how the economy can grow above 1.5-2.5% without a new stimulus package (that would be disastrous for the $ and interest rates and the US long term with budget deficits and debt ballooning), since the US economy is domestic demand driven (70% of GDP). And it will take many years for exports to significantly replace domestic demand as a share of the economy.

This does not mean Armageddon for the stock markets given that the FED will remain accommodative. Since July, my view has been that equity markets were going ahead of themselves and a correction was due. It is my opinion that we have entered this phase and we will witness a couple months of downward pressure, providing great opportunities to get back into the market.

I will carefully watch new economic releases and charts to lead me in my investment decisions.


Bureau of Economic Analysis: Gross Domestic Product – Fourth quarter 2009 (advance estimate)

Federal Reserve Bank of St. Louis - Economic Research: Tracking the Global Recession

The New York Times: Economy Grew at Vigorous Pace in Last Quarter

Gluskin Sheff – David Rosenberg: Lunch with Dave - The Houdini Recovery


Wall Street Journal: Europe’s Banks Tighten Credit, Frustrating ECB

Haver Analytics: U.S. GDP Revised Downward

Bloomberg: Economy in U.S. Grew at 5.7% Pace, Most in Six Years