U.S. Data Fluke Exaggerated Growth, Will Be Reversed

[jk]

from bloomberg today
http://www.bloomberg.com/apps/news?p...EW4&refer=home


U.S. Data Fluke Exaggerated Growth, Will Be Reversed (Update1)
By Carlos Torres

Oct. 27 (Bloomberg) -- An unexpected increase in auto production last quarter was a statistical fluke that will be reversed, making current U.S. economic growth even weaker, according to a former Commerce Department economist.

Last quarter's annualized 26 percent increase in auto production shocked Joe Carson, now director of economic research at AllianceBernstein LP in New York. Without the gain, the economy would have grown at an annual rate of 0.9 percent, not the 1.6 percent the Commerce Department reported today. [emphasis added]

The reported increase in output came despite cutbacks announced by General Motors Corp., Ford Motor Co. and others. A drop in the wholesale price of SUVs and light trucks as the automakers cleared leftover 2006 models made production look stronger than it actually was, said Carson. The economic fallout from the auto-industry cutbacks will instead come this quarter, he said.

``Last quarter was weak even with the benefit of this mismatch and the fourth quarter will now also be weak because it's going the other way,'' Carson said. ``Whatever output you have this quarter, which will probably be down, will be discounted by a likely rebound in prices.''

The mismatch can be explained by looking at how the government adjusts the figures for price changes.

Commerce Department economists use wholesale light truck prices, from the Labor Department's producer price report, to eliminate the influence of inflation on investment and inventories for that category. A 5.5 percent drop in price of SUVs and other light trucks last quarter made output look stronger when adjusted for inflation.

Growth Pessimism

Carson currently forecasts the U.S. economy will grow at an annual rate of 1.4 percent this quarter and said he wouldn't be surprised if growth came in at half that pace. AllianceBernstein is an asset management firm.

The median forecast of economists surveyed by Bloomberg News earlier this month was for fourth-quarter growth of 2.5 percent.

``We are looking into it to see if we can better understand the reasons for the large decline'' in prices, said Brent Moulton, associate director for national economic accounts at the Bureau of Economic Analysis, part of the Commerce Department, which produces the report on gross domestic product.

Carson wasn't the only economist shocked by the auto- production figures.

`Unbelievable Detail'

Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, called the numbers ``the most unbelievable detail'' in the GDP report.

The composition of growth last quarter, which included an unexpectedly large accumulation of inventories, also prompted other economists to reduce estimates for fourth-quarter growth. An increase in inventories overall suggests manufacturers may need to trim production this quarter.

The economy will probably grow at an annual pace of 1 percent from October through December, down almost a full percentage point from his earlier estimate, according to Joseph LaVorgna, chief U.S. fixed income economist at Deutsche Bank Securities Inc. in New York.

``A relatively large inventory build last quarter will need to be worked off and that will produce a negative hit to production, employment and income,'' LaVorgna added.

Ford, the second-biggest U.S. automaker, said car and light truck sales dropped 17 percent last quarter compared with the same period last year. The Dearborn, Michigan-based company cut third-quarter production by 11 percent, and plans to slash output by 21 percent this quarter.


NO ANTI-SPIN NEEDED

[jk]

Goldman Says Motherboard Demand `Falling off a Cliff'

Goldman Says Motherboard Demand `Falling off a Cliff' (Update2)
By Ian King


Oct. 27 (Bloomberg) -- Goldman Sachs Group Inc. cut its forecast for computer motherboard shipments, saying demand ``is falling off a cliff.'' Shares of Intel Corp. and Hewlett-Packard Co. dropped on concern a slowdown may spread across the industry.


Shipments of motherboards, an indicator of personal-computer sales, probably dropped 4.2 percent in October from the previous month, Goldman Sachs analyst Henry King said today in a note. He had earlier predicted a gain of 3.1 percent for motherboards, the circuit boards that connect the main components in a PC.


The reduction may signal fewer orders of semiconductors and related components from PC makers because of lower demand. Much of the slowdown is caused by Microsoft Corp.'s delay in introducing its new Windows Vista operating system, King wrote. Microsoft earlier this year pushed back the introduction of the software for consumers, already two years late, until January.


A decline in shipments ``happened earlier and more significantly than we expected,'' King wrote.


The Philadelphia Semiconductor Index dropped as much as 2.5 percent following the report by Goldman's Asia Pacific technology team, with National Semiconductor Corp., Intel Corp. and Micron Technology Inc. leading the decline. The index of 19 chip-related stocks slid as much as 11.48 points to 449.79.


King forecast motherboard shipments for the quarter will gain of 8.8 percent, down from an earlier prediction for 10.8 percent growth. The October decline compares with average month- over-month growth of 12.7 percent between 2001 and 2005, he said.


Oversupply


The slide may also leave motherboard makers with oversupply, King said, prompting a possible price war. Shipments are tracked out of Taiwan, where computer makers including Dell Inc. and Hewlett-Packard order their parts and have machines assembled.


``There's been some concern over inventory for a couple of quarters and but it's coming to a head right now,'' said Greg Barlage, who helps oversee about $35 billion at Baring Asset Management in Boston.


Shares of Palo Alto, California-based Hewlett-Packard, which surpassed Dell as the largest seller of PCs last quarter, fell 71 cents, or 1.8 percent, to $38.46. Shares of Round Rock, Texas- based Dell fell 26 cents, or 1.1 percent, to $23.11.


The delay to Microsoft's Vista may slice $4 billion from PC industry sales this year, according to Gartner Inc. To keep consumers from delaying PC purchases until Vista is released, Redmond, Washington-based Microsoft this week said it will offer coupons for free or discounted upgrades to Vista for customers who buy PCs with the older version.


Shares of Intel, the world's largest maker of personal- computer microprocessors, fell 67 cents, or 3.1 percent, to $21.10 at 4:30 p.m. New York time in Nasdaq Stock Market composite trading. Micron Technology shares fell 57 cents, or 3.9 percent, to $14.17. The Boise, Idaho-based company gets the majority of its sales from computer-memory chips.

[blazespinnaker]

Re: U.S. Data Fluke Exaggerated Growth, Will Be Reversed

Yeah, interesting movement in the markets today. Bonds are rallying big time, dollar has taken a beating lately as well. Are we at an inflection point? Stay tuned..

[spunky]

Re: U.S. Data Fluke Exaggerated Growth, Will Be Reversed

Yeah, interesting movement in the markets today. Bonds are rallying big time, dollar has taken a beating lately as well. Are we at an inflection point? Stay tuned..

We are all living in it , we cant tune out . :eek:

[blazespinnaker]

Re: U.S. Data Fluke Exaggerated Growth, Will Be Reversed

We are all living in it , we cant tune out . :eek:

Oh it's pretty easy to tune out, let me introduce you to my good friends Jim Beam and Jack Daniel.. ;)

That being said, it's a serious point.

If you stay carefully tuned and watch closely, I think you can make the right move sooner and smarter than the rest of the crowd. In fact, I don't even think you need to predict the future, just know the present a lot better.

And, no offense to our great leader EJ, but I'm not sure you can predict the future. You can only try, and by comparing your answers to what actually happens, develop a better understanding of the present.

[Finster]

Re: U.S. Data Fluke Exaggerated Growth, Will Be Reversed

Finster Anti-Spin

This ostensible data fluke is so insignificant in the larger context of the misleading nature of the GDP data that it is a lot like arguing whether the wallpaper was beige or pastel as the house is burning down.

Was the GDP growth really 0.9% instead of 1.6%????

Give me a break.

The story contains at most the barest clue as to what is wrong when it states:

Commerce Department economists use wholesale light truck prices, from the Labor Department's producer price report, to eliminate the influence of inflation on investment and inventories for that category. A 5.5 percent drop in price of SUVs and other light trucks last quarter made output look stronger when adjusted for inflation.

We need to keep in mind that the so-called "real" GDP that is being cited here is derived from measuring nominal GDP and backing out an estimate of inflation. It is this second part that leads to all sort of mischief, inadvertent or otherwise. The government hasn't the foggiest idea of what inflation is.

Let's take a closer look, just to get an idea of the scale of the problem here. In this latest GDP report, the BLS states:

The price index for gross domestic purchases, which measures prices paid by U.S. residents,
increased 2.0 percent in the third quarter, compared with an increase of 4.0 percent in the second.
Excluding food and energy prices, the price index for gross domestic purchases increased 1.9 percent
in the third quarter, compared with 2.9 percent in the second.

And that:

Current-dollar GDP -- the market value of the nation's output of goods and services -- increased
3.4 percent, or $111.0 billion, in the third quarter to a level of $13,308.3 billion. In the second quarter,
current-dollar GDP increased 5.9 percent, or $188.9 billion.

http://www.bea.gov/bea/newsrel/gdpnewsrelease.htm

So, the final "real" GDP figure cited above is derived from a nominal, actual GDP change of 3.4% and an assumed rate of inflation of 2.0%. The prior quarter the nominal GDP change was 5.9% and an assumed rate of inflation of 4.0%. Note that the swing in inflation alone - 2% - is nearly three times the size of the "fluke" which gets Carson all worked up. Is is possible that the precision to which inflation is known is on the order of 2%?

If so, then we don't know "real GDP" to any greater precision!

But the rate of inflation itself is an issue of rather profound controversy. Bill Gross of PIMCO has claimed that inflation runs at least 1% or more higher than government firgures indicate. John Williams of Shadow Governent Stats estimates that inflation is running as much as 3% or more above what the BLS states.

Moreover, the utiilty of even a presumed accurate real GDP in reflecting the true economic well-being of Americans is highly questionable. On Bloomberg just this morning, there was a discussion about why Americans don't feel anywhere near as good about the economy as conventional statistics like GDP would suggest they should. The reason is simple: most of what passes for GDP growth is just plain old inflation. Of course people don't feel like they're doing so well!

Thus the reported "real GDP" rate is mostly just a mirage. Obsessing over whether the mirage is 0.7% larger or smaller is like trying to dissect a gnat while an elephant is sitting on your shoulder.

[jk]

Re: U.S. Data Fluke Exaggerated Growth, Will Be Reversed

finster, i agree that all these gov't numbers are bogus. but my money is invested in markets, and markets price things according to the perceptions of market participants. ultimately, fundamentals have a way of coming to the fore, but we all know keynes' remark about markets and rationality. so what's interesting here is what kind of "news" the official numbers will deliver, and how that will effect participants' perceptions. everyone on this board is pretty convinced that things are [or are becoming] a lot worse than the markets "think." so when will the markets start "thinking" differently?

[Finster]

Re: U.S. Data Fluke Exaggerated Growth, Will Be Reversed

finster, i agree that all these gov't numbers are bogus. but my money is invested in markets, and markets price things according to the perceptions of market participants. ultimately, fundamentals have a way of coming to the fore, but we all know keynes' remark about markets and rationality. so what's interesting here is what kind of "news" the official numbers will deliver, and how that will effect participants' perceptions. everyone on this board is pretty convinced that things are [or are becoming] a lot worse than the markets "think." so when will the markets start "thinking" differently?

It's hard to disagree with your point here, jk. But think about the implications of what you're saying. To paraphrase, it's not the government economic stats that really matter, but what the markets think about them. The markets may or may not react "rationally" to the data. And since the "real economy" is so dependent on market action, you can even argue that the data react to the markets at least as much as the converse.

So why not just cut out the middle man and go directly to the action of the markets? It seems you are suggesting that although the market action or reaction is the truly important point, that nevertheless we ought to look at government numbers. If the market renders a verdict on the government numbers, your own argument would seem to suggest that it is the market's verdict, not the government numbers themselves, that we ought to concern ourselves with.

[jk]

Re: U.S. Data Fluke Exaggerated Growth, Will Be Reversed

It's hard to disagree with your point here, jk. But think about the implications of what you're saying. To paraphrase, it's not the government economic stats that really matter, but what the markets think about them. The markets may or may not react "rationally" to the data. And since the "real economy" is so dependent on market action, you can even argue that the data react to the markets at least as much as the converse.

So why not just cut out the middle man and go directly to the action of the markets? It seems you are suggesting that although the market action or reaction is the truly important point, that nevertheless we ought to look at government numbers. If the market renders a verdict on the government numbers, your own argument would seem to suggest that it is the market's verdict, not the government numbers themselves, that we ought to concern ourselves with.

of course there are folks into technical analysis who do just what you say: ignore the fundamentals and just look at market action. [indirectly relying on the actions of others who do indeed look at fundamentals.]

i think the hard part of being fundamentally oriented is being patient. it's the waiting. so that, i suppose, is really what that post about the gdp numbers is about. it implies that eventually, and perhaps soon, even the official numbers are going to reflect the underlying problems in the economy.

[DemonD]

Re: U.S. Data Fluke Exaggerated Growth, Will Be Reversed

But when you are right on the fundamentals, it feels oooooooooh so right.

(Like the people who did their DD and bought some MO [phillip morris] in 2001 when it hit 20/share on all the tobacco litigation - which by the way would have absolutely pulverized almost any PM investment)

I know we don't do a lot of individual securities talks around here but they just happen to be my favorite investment vehicles. At some level, unless you actually hold physical cash and/or PM's, you "invest" your money in some asset that has people behind it, and I find it easiest to put my money behind institutions that have survived and thrived through all of the conditions we have talked about here.

But yes, patience and diligence are needed for any fundamental investing. It is still good to know the technicals. Personally I stick around here because I have no concept of macro-economics and this site has helped me target what I should and should not be investing in (in terms of stocks and cash) in the next 5 years.