S&P vs GDP

An analyst pointed out that -

At the risk of provoking a spat - 

There's a gap in demand

Between equities and

The economy, which is still flat. 

Bear Warning

Said one of those skeptical guys,
As the market was hitting new highs:
"The bulls may suppose
The economy grows,
But I doubt that the latter complies."

GDP Shrinkage

GDP's negative trending
Is not the economy's ending;
We're having a boom
In the stuff we consume,
Offset by less government spending.

It was a shock to read yesterday that the US economy actually shrank by -0.1% in the fourth quarter of 2012, but the markets reacted steadily.  It appears that, beneath the negative headline number, the private economy is actually doing pretty well.  Here's the Washington Post on the breakdown of the numbers (see chart at right):

The GDP report for the fourth quarter of 2012 is, on its face, disappointing. The economy shrunk, at an 0.1 percent annual rate, the first such contraction since the recession’s nadir in 2009. But commentators are surprisingly upbeat about it. Spending and investment are still looking good, but sharp contractions in business inventory and federal defense spending sunk the overall number. Paul Ashworth at Capital Economics called it “The best-looking contraction in U.S. GDP you’ll ever see.”

GDP, or GDI?

Though GDP seems to be surging,
Economists' views are diverging,
For if growth is discerned
By what's made (vs. earned)
May foretell if it's flat or encour'ging.

There are many ways of measuring an economy, among which are gross domestic product (GDP) - the value of all goods and services produced - and gross domestic income (GDI), the earnings of all economic actors. Theoretically, GDP should equal GDI, since the product I buy is equal to the income you earn. However, sometimes they diverge, and rarely more so than today.

This morning the Bureau of Economic Analysis released the third revision of 3rd quarter GDP.  As Matt Yglesias blogged in Slate: "the news is good. What was initially reported as growth at a 2 percent annual rate and then revised up to a 2.7 percent annual rate now stands at a very respectable 3.1 percent annual rate. In nominal terms, we now have Q3 clocking in at 5.9 percent growth which is the kind of thing that's consistent with catchup." So, all's well? Not quite: GDI grew by only 1.4%. Now, ours is a big economy and certainly not easily measured, but that's a big divergence. Yglesias suspects that the more optimistic GDP number is closer to the truth, on the evidence of President Obama's decisive electoral victory. After all: in politics, "it's the economy, stupid."

A Chicken & Egg Problem

For GDP growth to look handsome,
Manufacturing's got to expand some,
But someone must buy
That expanded supply,
So we've got to expand our demand some.

"Without Demand, Manufacturing Can’t Pump Up Output or Jobs," says The Wall Street Journal's Real Time Economics blog. As much as many, including the White House, have pinned their expansionary hopes on a US manufacturing renaissance, this only works if foreign and domestic demand keeps those factories busy. Right now, both appear to be softening.

Recent factory surveys from the Federal Reserve Banks of New York, Philadelphia, Richmond and Kansas City show more respondents reporting falling orders than expanding. Moreover, "a third-quarter survey done by professional services firm PwC found 67% of major U.S. industrial multinationals said 'lack of demand' was an expected barrier to their company’s growth over the next year. That was the No. 1 choice among a list of obstacles that included energy prices, regulatory pressures and taxes, and was a jump from 48% pointing to a lack of demand in the second quarter."

Third quarter US GDP is set to be announced this morning at 8:30, with the consensus forecast of an expansion at a tepid 1.7% annualized rate. At the moment, the prospect of manufacturing our way to faster growth looks dim.