In “Market Cheers Over Ugly GDP Report“, Mike “Mish” Shedlock breaks down the components of the Q3 GDP numbers and laments that “I am struggling to understand what is surprising other than how bad this all looks once you break down the numbers.”
The surprise was that the annualized GDP of 3.5% was a smidge higher than the expected 3.2%. The stock market also held an air of relief as it bounced sharply off deeply oversold conditions. Stocks sold off aggressively going into this report, so I have to assume that fear was building that the GDP number would come in well below the expected 3.2%. What surprised me is that the higher than expected GDP number did not lead to fears that the Fed will discuss hiking rates in its meeting next week despite its insistence that rates will remain low well into 2010.
Mish notes that the GDP gains came at a heavy price: “…the only reason GDP rose is wasteful government spending, cash-for-clunkers and extremely unaffordable housing tax credits whose effect is soon going to start diminishing even though the program was just extended.” Many economists share his concern that the government-sponsored boost to GDP is unsustainable. Then again, the whole point of all the spending was to generate these kinds of results with the assumption that somehow it could be sustained by the private sector sometime soon. It would be a surprise that all the spending did not generate some kind of boost in the quarter the spending occurred. Sure, waste is nothing to cheer about, but I have to assume that GDP expectations included the now observed components. How else could the consensus opinion come so close to the real number?
Speaking of actual vs estimates, I am always left wondering how economists come so close to the actual numbers in the first place. In an economy as large and complex as America’s, I would expect more frequent and larger divergences. It leaves me wondering:
- Are government statisticians providing early estimates, just as companies provide earnings guidance for future quarters?
- Does the government manage reports to consensus expectations like companies manage to earnings?
- Or, more simply, are the formulas and methods so well-known that it is easy to cobble together estimates from existing data?
Anyway, Mish expects the U.S. economy could print negative GDP numbers again as early as the first quarter of 2010. Given the Congressional Budget Office has a very modest estimate of 1.5% growth for 2010, one or two quarters of additional contraction next year could easily occur. For stark contrast, note that Barclay’s has increased its forecast of first quarter 2010 GDP to 5% based on these third quarter results.
The implication in all this uncertainty is that the stock market should perform very unevenly next year.
Stay tuned and be careful out there!
Full disclosure: no positions.