Here's for not understanding GDP numbers

In addition to the plethora of economic information coming out today, advance GDP numbers came out for quarter 1 early this morning. I'm not surprised that the current account deficit narrowed, that is to be expected with a weaker dollar. Looking at the percentage change table, it is clear that inventories were strong and services were strong. The increase in inventories was responsible for a 20 billion dollar increase, but the increase in services was responsible for a 40 billion increase. The Q4 inventory data was pretty awful, so I'm not surprised there was a bit of mean-reversion. However, I'm more surprised at services being as strong as they are.

If you go into table 2.3.1 (or 2.3.6), you will see why services are strong. Basically, in spite of a housing recession, spending on housing (services, not to be confused with residential investment) goes up. I'm not surprised that housing operation is going up (electricity is increasing at a 15% rate), but I'm a little baffled why in the middle of dramatic decreases in home prices and sales that spending on housing would be increasing. Medical care and household operation (electricity mostly) make up a big percentage of the increase in services (and therefore services), roughly half. And another large increase is due to other. The big question I have is, why isn't spending on housing services decreasing in the GDP numbers rather than consistently increasing? The durable goods section showed only a small decrease, but the average increase since 2006 in the housing services number has been .6% and increased by .55% this time. Effectively in line. Granted that the ISM non-manufacturing index was below 50 the entire quarter, it makes even less sense why services would be increasing.

Ultimately, if you use better inflation numbers or per-capita figures, this would probably be the second quarter of a declining GDP. Not the best definition of whether we are in a recession, but it's what the financial press usually talks up.

2/1/2008

The jobs number was in negative territory. Not one of the 80 economists surveyed by Bloomberg predicted it would be that low. You could have made 140 dollars per 100 shares of SPY shorting in the pre-market and covering before the squeeze.

In other news, the ISM index was slightly better than expected. The initial market reaction was bullish, but I suspect that was hampered by thoughts of a smaller rate cut. Gold has been down, railroads up, mortgages are up (Fannie, Freddie, etc), but what is up has been trending lower and only has relative strength because of a strong open. Everything else I'm looking at is kind of mixed.

Tomorrow's job data

Payroll and unemployment numbers come out tomorrow. I've been watching the Birth/Death model for months now. This model is meant to adjust employment numbers to take into account the Birth and Death of businesses. The problem is that statistical forecasting is much better at predicting the trend going forward than it is the turning point. If the economy turns south, the BD numbers will make the situation appear rosier than it would be otherwise. Mish, Barry Ritholtz, and John Crudele have all expressed concerns about the numbers. Briefing.com shows the consensus around 70,000-80,000 compared to a prior number of about 18,000. I'm agreeing with Barry and John that the number will probably be significantly lower. Maybe as much as 25-50% lower. The reason, explained by each, is that every year there is an annual rebalancing of the Birth/Death Model to recalibrate their estimations. If there is a significant deviation of the model with reality, the model will be adjusted to take that into account. In a time when advance GDP in Q4 came in at .6% and Q3 was only up due to better than expected inventory numbers, it's likely that there will be a significant adjustment.

From the short-term perspective it will be curious how the market reacts. If they are not aware of this information (traders read the Post for sports not finance), they will think the economy is worse than expected and play up hopes for a rate cut. However, they will have to weight rate cuts with a shitty economy. The person who follows the Birth/Death numbers already knows that the intermediate outlook for the economy is absolutely awful and the numbers have made it appear much better and should already be short (or in bonds) in that time frame. In the shorter-time frame, it will be easier to just take advantage of those who don't read the Birth/Death numbers. For the short-term, Gold will be a buy no matter what the market thinks will happen.