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GDP Report: "Good News" - You’ve Got to be Kidding! |
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FORECASTS & TRENDS E-LETTER IN THIS ISSUE: 1. The Huge Response to Last Week’s E-Letter 2. Surprise, Surprise: The Economy Slowed in the 2Q 3. Fed Policy Meeting Today & Tomorrow – QE3?? 4. Is the Stock Market High On QE3 Expectations? Today’s Overview I must begin today by thanking you for the overwhelming reader response we received to last week’s E-Letter. It was the largest response we’ve had in several years. Obviously, I struck a nerve with many of my readers last week! I’ll fill you in just below. Following that discussion, we dissect last Friday’s controversial 2Q GDP report, which most found disappointing but some in the mainstream media found encouraging (ie – at least we’re not in a recession). From there, we’ll discuss the Fed’s latest monetary policy meeting that ends tomorrow. The stock markets rallied strongly last week, partly on perceived good news from Europe, and partly because of renewed expectations that the GDP report would be weak enough to move the Fed to enact QE3. We’ll know one way or the other tomorrow afternoon. If Bernanke fails to announce more QE, stocks could tumble again. The Huge Response to Last Week’s E-Letter In last week’s E-Letter, I wrote about several topics that are near and dear to most of us:
Welfare Work Requirement Gutted by Obama Near the end of that letter, I posed a potentially very risky question. I wrote:
“All of these [the above] are depressing headlines, no doubt about it. But in the big picture, what may be even more depressing is the question of whether or not these trends are the result of some grand design. Take for example the Obama administration’s latest executive directive to eliminate the work requirements to receive welfare payments just four months before the elections. No one can definitively rule out that this was done to increase the number of people who are dependent on the government, and thus more likely to vote for the president in November. Ditto for those on disability insurance and food stamps, which are both at record highs. I can’t say for sure, but I suspect it is a combination of both. I know that is a very controversial statement to make, and I know that my liberal readers will take me to the woodshed in their e-mails just ahead. But if you stop and think about these troubling trends in our country, somebody has to at least raise the possibility. I am not afraid to be one of those making these observations and asking these questions! If you agree with me, I encourage you to let me know. Most of the time, I only hear from those who disagree.” Let me tell you – we received the LARGEST RESPONSE we’ve had in years to one of my E-Letters!! In fact, they’re still coming in. The ratio of positive responses to negatives was huge! There were hardly any negative responses. Obviously, I struck a nerve suggesting that some of these depressing developments in our country could be part of a “grand design” to get more people dependent on the government. I want to thank all of you who responded from the bottom of my heart! And I want you to know that I read ALL of your responses, and I appreciate them very much. How to Address Your #1 Concern One of the most common themes in your responses was the frustration over not getting this kind of news from the mainstream media, with many of you wondering how to spread the word about these abuses we see in government. I’m glad you asked, because you can be part of that solution. It’s clear that the mainstream media is in love with Team Obama and the liberal Democrats. As a result, you’re not likely to hear any investigative journalism like you’ll read in my weekly E-Letter and blogs. However, while my writings go out to a distribution list numbered in the hundreds of thousands, we’re going to need a lot more than that to change the regime in Washington come November. That’s where you come in. I’m sure you have family and friends that think like you do and are just as concerned about what’s going on in Washington as we are. If so, I urge you to forward my E-Letter and blogs on to them so they can become part of the conversation. Not only that, ask them to subscribe to the E-Letter and blogs so that they can receive them directly, and then forward them on to their family and friends. The result could lead to an ever-growing influence of conservative thought. Plus, they will have access to lots of valuable information and analysis on the economy, the markets and investment trends. Remember that the E-Letter and blog are FREE subscriptions, so I’m not asking you to cost your friends and family money or line my own pockets. Plus, our readers’ privacy is also safe with us. We never have and never will share any of your personal information with anyone. You have my word on that. Those who know me well know that I don’t like to engage in a lot of self-promotion. However, I feel strongly that the nation is on the wrong track, and I’m more than happy to expose the lies, cover-ups and corruption that seem to be so much a part of our current political class. If you agree, I urge you to become part of the solution. Otherwise, your family and friends are going to be limited to what the mainstream media would rather them know (or not know). It’s going to take a concerted effort such as this, on many fronts, to counter the liberal forces so prevalent in the media, academia, entertainment, etc. Better information makes for better voters and a better influence for conservative principles. Perhaps even our elected officials will sit up and take notice. Strength in numbers is a defining characteristic of a democracy, so I urge you to forward last week’s E-Letter and get the ball rolling. Here is the link to last week’s E-Letter (I suggest you start by sending that): http://forecastsandtrends.com/article.php/807/ Along with the subscription information for the E-Letter and the blog: Click on this link to subscribe to the Between The Lines blog. Click on this link to subscribe to the Forecasts & Trends E-Letter. Thank you again for your heartfelt support! Let’s take our government back in November!! And now on to the rest of today’s letter. Surprise, Surprise: The Economy Slowed in the 2Q The Commerce Department reported on Friday that 2Q GDP increased by only 1.5% (annual rate). This was the first of three estimates on 2Q growth. Actually, the 1.5% number was about in line with the pre-report consensus of 1.4% and considerably better than some late estimates that the number would come in below 1%. The Commerce Department also revised its 1Q GDP number up slightly from 1.9% reported earlier to 2%. The modest growth of 1.5% in the 2Q was driven primarily by consumer spending (which slowed nonetheless, see below), exports, non-residential fixed investment and inventory building.
The slowdown in the 2Q was not entirely surprising given that consumer spending has been weak recently, the government has been cutting spending and hiring has been tepid. The economy needs to grow over 3% a year to bring the unemployment rate down, and since consumer spending accounts for roughly 70% of GDP, it too needs to grow at least 3% annually to grow the economy. But growth in spending also slowed to only 1.5% in the 2Q, down from 2.4% in the 1Q, showing that households are continuing to deleverage three years after the recession.
The chart above shows the annualized rate of growth in consumer spending for the last five quarters. As noted above we need at least 3% annual growth in consumer spending to fuel the economy. But with the big drop off in the 2Q, spending growth was half of what we need. The decline in the growth rate is largely attributed to the decline in consumer confidence over the last several months. Whatever the reasons, this is the slowest recovery from a recession since at least 1960 – only a fraction of the pace of recoveries following past recessions. Historically, we would have expected GDP growth of at least 5-6% at this point, but we’re struggling to reach even half of that pace. In light of Friday’s report, forecasters are once again lowering their growth estimates for the second half of this year, and they weren’t that optimistic to begin with. Some even fear that second half growth could be even slower than the 1.75% rate in the first half. That will depend, of course, on what happens with consumer confidence and spending. Finally, The Commerce Department also released GDP revisions on Friday going back to the start of 2009. While the revisions showed that growth in 2010 was weaker than previously estimated, 2009 and 2011 were slightly stronger. Other Economic Reports of Late Orders for durable goods in June came in better than expected at +1.6% for the second month in a row. Initial claims for state unemployment benefits for the week ended July 21 came in at 353,000, down from 388,000 in the previous week. Retail sales fell for the second consecutive month in June, down 0.5%, and well below expectations. Preliminary data suggest that retail sales were also weaker in July. The Index of Leading Indicators fell 0.3% in June after rising by 0.3% in May. On the housing front, sales of new and existing homes fell more than expected in June. Building permits were also lower last month. On the bright side, housing starts rose more than expected in June, and the median sales price of homes sold in June rose 7.9% over year-ago levels to $184,000. Tomorrow we get the latest ISM manufacturing number for July. You may recall that this key index fell to a reading of only 49.7 in June. A reading below 50 in the ISM indicates that the economy is contracting. The pre-report consensus suggests it fell slightly more in July. Fed Policy Meeting Today and Tomorrow – QE3?? The Fed Open Market Committee (FOMC) is meeting as this is written. As has been the case all year, all eyes will be focused on the Fed’s policy statement tomorrow afternoon. The last time the FOMC met in late June, I suggested that the Committee would want to wait and see last Friday’s GDP report before deciding if they want to do more stimulus (ie – QE3). The question is, was last Friday’s GDP report showing growth of 1.5% enough of a disappointment to push the Fed to act? No one knows for sure, of course. I think had the GDP number come at only 1% or less, the Fed would be more likely to act. The 1.5% number was bad, but it was in-line with expectations (more about that later on). The other issue I have raised in recent weeks is whether or not the Fed would even consider QE3 beyond this week’s meeting. The thought is that the Fed would not want to do QE3 any later in the year due to the risk that it might be viewed as a political move ahead of the election. Other Fed watchers think the FOMC could do QE3 as late as the September 12-13 policy meeting. Fed Chairman Bernanke is not scheduled to hold a press conference tomorrow after the FOMC meeting, but he does have one already scheduled for September 13. We’ll see. Is the Stock Market High On QE3 Expectations? If you have been watching the stock market action recently, you have to be wondering what is serving as the catalyst for its major leap last week. Believe it or not, some say it was the GDP report, while others say that Europe finally has its act together (yeah, right). The idea has even been floated that the market is high “on drugs” – QE3 drugs, that is (I’ll explain why below).
Let’s look at the Eurozone first. The “good news” that supposedly drove the stock markets up last week was an announcement by European Central Bank president, Mario Draghi, pledging that he would do “whatever it takes to save the euro currency union.” My first reaction was to ask why it took him so long to make this pledge. My second reaction was, “so what?” It would be like Ben Bernanke announcing that the Fed was going to do whatever it takes to cure the US economy (which, by the way, he has said and it hasn’t worked). Would you believe that all of the problems facing the US economy are going to disappear just because Big Ben said he’s going to fix it? Of course not! Next, last Friday’s disappointing GDP report did meet pre-report expectations as I discussed above. Not surprisingly, some talking heads in the financial media concluded that it was good news in that we’re not in a recession. If you recall, however, I had already told you that GDP expectations had generally been downgraded based on falling consumer confidence. So while the GDP did meet expectations, they were significantly lowered expectations. To put it in the context of the ongoing Olympic Games, it would be like giving an athlete a medal in the high jump after lowering the bar to make sure he/she couldn’t miss. Again, about the only good news about last week’s GDP report was that the economy isn’t in a recession (for now). Other than that, economic growth is slowing, and that’s bad news where I come from. Thus, my opinion is that the strong market action of late is largely the result of increased expectations that the Fed is going to do QE3. Stock investors don’t really care what Bernanke says; they continue to believe that the Fed will cave at some point and deliver another round of quantitative easing soon – perhaps as early as tomorrow afternoon. Only in today’s crazy environment, with a stock market bubble artificially inflated by the Fed, would slowing growth and another empty Eurozone promise be viewed as good news. It remains to be seen if the Fed announces QE3 tomorrow. If not, expect a negative reaction in stocks! _____________________________________ Thanks again to all of you who responded to my E-Letter last week! Think about forwarding it to others who share our concerns and want to take our country back before it’s too late. Wishing you profits in a dangerous market,
Gary D. Halbert SPECIAL ARTICLES Obama’s policies are hostile to growth |
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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent. |
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