Bureau of Labor Statistics
The carnage was pretty widespread with nearly every sector in decline. Government, personal consumption of services, exports of services and imports of services posted weak gains. Every component of fixed investment was down with no improvement in residential investment. Ugly? Yes, but not as bad as was expected.
The most interesting point for me was the change in inventories, which posted a gain of 6.2 billion dollars and contributed more than 1% to the growth rate (in the positive direction). This is relevant because inventories have been decreasing for the previous four quarters.
Typically you might expect inventories to rise in the face of economic weakness as sales slow down. However, better management has allowed firms to be more nimble. Hence, even as the economy has been slowing over the last year, inventories continued to fall in anticipation of things getting worse over the next few quarters. Now inventories rose (albeit by a small amount) just as the GDP figure turns the corner sharply negative. Does this mean firms have already cut back in anticipation and it wasn't enough? Does this mean things are on the verge of getting even worse?
Not so fast...
There is some reason to wonder about these numbers. For that, we go to the Wall St. Journal's Real Time Economics blog:
For a possible reason why, one only had to look at the previous paragraph:
In other words, the reason inventories didn't fall was because of the IVA. So had it not been for the huge fall in energy prices, inventories would have decreased--perhaps be a large amount. This would have caused the reported drop in GDP to be significantly worse than 3.8%.
Translation: It's worse than you think.
But at the same time, the fact that it was the IVA that was responsible for the inventory numbers being high means that firms probably still are paring down inventories and not being caught unaware.
Translation: The better than expected number today does not necessarily mean a worse than expected number next quarter.
I'm inclined to accept both implications. Most importantly, the economy is likely contracting more than the headline number makes it appear.
All the usual caveats about the data being preliminary and subject to revision certainly apply--especially in situations such as this.
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 3.8 percent in the fourth quarter of 2008, (that is, from the third quarter to the fourth quarter), according to advance estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP decreased 0.5 percent.
The carnage was pretty widespread with nearly every sector in decline. Government, personal consumption of services, exports of services and imports of services posted weak gains. Every component of fixed investment was down with no improvement in residential investment. Ugly? Yes, but not as bad as was expected.
The most interesting point for me was the change in inventories, which posted a gain of 6.2 billion dollars and contributed more than 1% to the growth rate (in the positive direction). This is relevant because inventories have been decreasing for the previous four quarters.
Typically you might expect inventories to rise in the face of economic weakness as sales slow down. However, better management has allowed firms to be more nimble. Hence, even as the economy has been slowing over the last year, inventories continued to fall in anticipation of things getting worse over the next few quarters. Now inventories rose (albeit by a small amount) just as the GDP figure turns the corner sharply negative. Does this mean firms have already cut back in anticipation and it wasn't enough? Does this mean things are on the verge of getting even worse?
Not so fast...
There is some reason to wonder about these numbers. For that, we go to the Wall St. Journal's Real Time Economics blog:
Almost all the overshoot in GDP relative to consensus was in the inventory component; final sales fell at a 5.1% rate, with consumption down 3.5% and [business spending] on equipment and software down a massive 27.8% (biggest drop in 50 years) both worse than we expected. Net trade was much better than we expected, adding a hard-to-fathom 0.1% to growth; the BEA must have assumed much better December numbers than us. The big mystery, though, is the $6.2B rise in inventories, which bears no resemblance the monthly numbers. It makes us more bearish for the first quarter because this rise has to reverse in some size. In short, we are not comforted. -Ian Shepherdson, High Frequency Economics
For a possible reason why, one only had to look at the previous paragraph:
The inventory miss reflected a huge swing in the inventory valuation adjustment (or IVA). The fourth quarter IVA was +$211 billion vs -$97 billion in the third quarter -- a jump of more than $300 billion (or +11 percentage points of GDP at an annual rate). In the past 10 yrs, the next largest one-quarter swing in the IVA was $38 billion. The IVA is an adjustment used to translate the reported book value changes in business inventories to an economic value. We had expected to see a sizeable jump in IVA given the big drop in energy prices, but the actual outcome turned out to be several multiples of our model-based estimate, which relies on the historical relationship between the IVA, energy prices and other factors. -David Greenlaw, Morgan Stanley
In other words, the reason inventories didn't fall was because of the IVA. So had it not been for the huge fall in energy prices, inventories would have decreased--perhaps be a large amount. This would have caused the reported drop in GDP to be significantly worse than 3.8%.
Translation: It's worse than you think.
But at the same time, the fact that it was the IVA that was responsible for the inventory numbers being high means that firms probably still are paring down inventories and not being caught unaware.
Translation: The better than expected number today does not necessarily mean a worse than expected number next quarter.
I'm inclined to accept both implications. Most importantly, the economy is likely contracting more than the headline number makes it appear.
All the usual caveats about the data being preliminary and subject to revision certainly apply--especially in situations such as this.
Learn to control your emotions, here is a fantastic article on erratic behavior and day trading. We call it irrational exuberance.
http://blackvaultcm.blogspot.com