Mish's Global Economic Trend Analysis |
| Diving Into the GDP Report - Some Ominous Trends - Yellen Yap - Decoupling or Not? Posted: 31 Jan 2015 05:02 PM PST Yellen Yap On Thursday, Fed Chair Janet Yellen met with Senate Democrats at a private luncheon. She told the Democrats that the U.S. Economy is Strong. My first thought was "what the heck is Yellen doing holding a private lunch with Democrats only?" Had she met with Senate Republicans, I would have asked the same question. Apparently this is common procedure for Yellen, so perhaps I am reading too much into it. Yet, I cannot help wondering if the real purpose of the meeting was to persuade Democrats to block any "Audit the Fed" Initiatives. Glowing Report Regardless of the reason, Yellen had some pretty glowing things to say. "She went through the issues of unemployment and inflation. Very positive. And economic growth numbers were good, have been good. There's work to be done," Sen. Richard Durbin (D-Ill.) said after the luncheon. No Rate Hike Soon Bloomberg reported Yellen Tells Senators No Rate Rise Soon Amid Concerns Abroad. "Her message is that the economy's getting better but there's still a ways to go in terms of job creation," New York Senator Charles Schumer said today in an interview on Capitol Hill. "That worry seems, in her mind, to be paramount and that's why she is not going to raise rates immediately."GDP Expectations Fall Short On Friday 4th quarter GDP estimates came in below economist expectations. Bloomberg reported "The advance estimate for fourth quarter GDP growth disappointed with a 2.6 percent figure versus analysts' estimate of 3.2 percent and following 5.0 percent for the third quarter. Final sales of domestic product slowed to 1.8 percent, following a 5.0 percent jump in the third quarter. Final sales to domestic purchasers eased to 2.8 percent from 4.1 percent in the third quarter." Diving Into the GDP Report With that backdrop, lets dive into the BEA Fourth Quarter and Annual 2014 Advance GDP Estimate. Change in Real GDP - Personal Consumption Expenditures  click on chart for sharper image Several PCE items stand out. Is the 2.87% increase sustainable? And what about health care? In the last three quarters, health care expenditures added 0.45, 0.52, and 0.51 percentage points to GDP. Wasn't Obamacare supposed to reduce costs? Curiously, gasoline added 0.25 percentage points to GDP in spite of rapidly falling prices. Motor vehicles and parts show rapidly slowing growth since second quarter. That's a trend I expect to continue. I discussed autos on January 6 in Economists Upbeat Despite 4th Consecutive Decline in Factory Orders; Auto Orders vs. Expectations. Autos are slowing and so will auto-related jobs. Yet economists believe "Auto sales are expected to reach their highest level in a decade this year, bolstered by strong job gains and cheap gas." My take: Autos will soon subtract from GDP. Change in Real GDP - Gross Private Investment, Exports  Growth in fixed investment is falling rapidly. Equipment, industrial equipment, and transportation equipment are already in contraction. Inventories added 0.82 percentage points to fourth quarter GDP. Over time, this series trends to zero, so expect a pull back next quarter. Rising imports subtract from GDP. Imports actually took 1.39 percentage points from GDP. If oil prices head back up, even modestly, this number could get worse. Exports added 0.37 percentage points to fourth quarter GDP. But note the trend. Because of the rising US dollar, export growth is dwindling. Will exports add or subtract to GDP next quarter? All things considered, this GDP report is far more than a simple snapback from the rapid expansion last quarter. Canada in Recession, US Will Follow in 2015 Earlier today in Canada in Recession, US Will Follow in 2015, I stated "A Canadian recession is underway. US will follow." Decoupling or Not? I remain amused by all the pundits who think the US has "decoupled" from the global economy and will grow stronger in 2015. Let's return to a question I asked above: Will exports add or subtract to GDP next quarter? I suggest the answer is subtract. Not only are US exports getting more expensive relative to Europe and Japan, the entire rest of the global economy is slowing rapidly. Our biggest trading partner is Canada and Canada is in recession, with a rapidly sinking loonie (Canadian dollar) on top of it. US Recession The US won't decouple, just as China did not decouple from the global economy in 2008-2009 (a widely-held thesis I also knocked at the time). Indeed, now that virtually no economist expects a US recession, I believe we are finally on the cusp of one, just as the Fed seems committed to hike. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Canada in Recession, US Will Follow in 2015 Posted: 31 Jan 2015 12:14 PM PST On January 21 when the Canadian Central Bank unexpected slashed interest rates, I wrote Canadian Recession Coming Up. Following the rate cut, the yield curve in Canada inverted out to three years. Inversion means near-term interest rates are higher than long-term rates. I saw no other person mention the inversion at the time. An inverted yield curve generally portends recession. Nine days later, the Canadian yield curve is still inverted. Let's compare what I posted about the curve on January 21 vs. January 30. Canadian Yield Curve January 21
Canadian Yield Curve January 30
Not only did yields plunge across the board since then, the yield curve is still inverted all the way out to three years. Recession Has Arrived There is no point in waiting for further data. The Canadian recession has already arrived. On Friday, the Financial Post reported Canada GDP Shrinks on Biggest Factory Drop in Six Years. The Canadian dollar plunged below 79 cents US today after data showed Canada's gross domestic product contracted in November as manufacturing dropped the most since January 2009 and on declines in mining and oil and gas extraction. "Insurance" The Bank of Canada called the rate cut "insurance". Insurance from what? If they think it will halt a recession, it won't. The recession is here. There is no need to wait for another quarter of declining GDP to confirm. A Canadian recession is underway. US Will Follow I remain amused by all the pundits who think the US has "decoupled" from the global economy and will grow stronger in 2015. Here's news: "It won't", just as China did not decouple from the global economy in 2008-2009 (a widely-held thesis I also knocked at the time). Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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