Full Stop for the US in Q4 2007
Most people anticipated that the Fed would follow through on its 0.75 emergency cut last week with another cut today at the scheduled meeting (FOMC); the only question was always how much Bernanke would look south, the consensus hovering between a 0.25 and 0.5 % cut. The economic calendar I use to keep my life on a straigh line has the 'consensus' at 0.25% but I guess others see this at 0.5%. Well, we will find out soon enough I guess and with the recent rather stark reading from headline Q4 GDP we are clearly drifting closer to the 0.5% scenario than the milder 0.25% counterpart. As suggested the numbers provide pretty rough reading pointing towards how the US may well be in a recession as this is getting typed (i.e. as we have entered Q1 2008). Both Bloomberg and IHT have useful summaries of the main pointers in question ...(note in particular the evolution in exports which suggest that all that talk about de-coupling and re-balancing might not fit so well with what is actually going on in the real world although of course there may be J-curve effects here)
The U.S. economy almost stalled in the final quarter of last year with a growth rate of just 0.6 percent, its worst year since 2002. The Commerce Department's report on the gross domestic product, released Wednesday, showed an economy that had deteriorated considerably during the October-to-December quarter as worsening problems in the housing market and harder-to-get credit made individuals and businesses more cautious in their spending. Fears of a recession have grown. For all of 2007, the economy grew by just 2.2 percent, the weakest performance in five years, when the country was struggling to recover from the 2001 recession. The housing collapse dealt the economy its biggest blow last year. Builders slashed spending on housing projects by 16.9 percent on an annualized basis, the most in 25 years.
The fourth-quarter's performance was much weaker - half the pace - than economists were expecting. They were forecasting growth to clock in a 1.2 percent pace.The 0.6 percent annualized increase in gross domestic product marked a big loss of momentum from the third quarter's brisk, 4.9 percent showing. The fourth-quarter pace was the slowest since the first quarter of last year.
Sales of U.S. goods and services abroad also slowed sharply in the fourth quarter. Exports grew at a 3.9 percent pace, compared with a sizzling 19.1 percent growth rate in the third quarter. That strong export growth was a key reason why the economy performed so well as a whole in the prior quarter. For all of 2007, exports grew by 7.9 percent, the slowest in two years.
So, if this was the main headline story I still think that there are some interesting discourses out there which are interesting to take note off. In particularly, I think that Macro Man's recent indulgences (i.e. his famed 'muddle-through' scenario) on the inventory cycles provide an interesting perspective to the whole idea of a US in recession. The idea goes something like this ...
Macro Man's "muddle through" view on the US economy received something of a fillip yesterday with the release of much-stronger-than-expected durable goods data orders data. Mechanically, the strong core shipments data (+2%) and inventory data (+0.8%) should buoy the Q4 GDP figure released today, as they are plugged straight into the GDP model equation. Incidentally, the latter figure conforms to Macro Man's view that much of the recent softness in the data has been down to an undesired inventory build-up late in the year, which will take a couple of months to work out- just as it did this time last year.
Now, as is readily clear at this point the Q4 GDP did not seem to be buoyed in any given sense of the word but as MM goes on to say in the comments section;
yes, headline gdp was rubbish, but inventories subtracted 1.25% from growth. Ultimately, that bodes better for the future than a higher headline print showing a hefty inventory build.
This seems right to me and at least I think that we should keep a weary eye on this as we move forward especially since I am entertaining a similar hypothesis (currently residing somewhere at the back of my head) on Japan. I am not looking for how Japanese inventory shifts per se will make the coming slowdown 'milder' than it appears since I think that the downscaling in Japan at the moment is very real but I am intrigued by finding out how the triangle of industrial production, inventories and growth (or expectations thereof) of exports go together. Turning finally to the US again Stefan Karlsson serves up some adept national accounting to suggest that the US already was in a recession in Q4 ...
While the headline volume number for real GDP in the U.S. stayed above zero in the fourth quarter of 2007, the more relevant terms of trade adjusted real GDP fell below zero. Nominal GDP rose 3.2% and the domestic purchases price index rose 3.8%, implying that real GDP fell with 0.6% instead of the 0.6% increase implied by the volume number.
Pears and apples I think is the important issue here but that notwithstanding I don't doubt Mr. Karlsson's calculations which are even quite timely I think since they do go into the heart of one of the myriad of caveats which exist in terms of actually doing national accounting.