Record US Stocks as US 1Q 2015 GDP Grows By Only .2%!

The Federal Reserve of Atlanta’s GDPNow or the real time forecasting of the statistical economy now look prescient or prophetic with the affirmation of the US 1Q GDP which turned out with a disappointing (to the mainstream) .2%. 

As I pointed here, record stocks in the face of only .2% growth have extrapolated to deepening signs of economy-financial markets disconnect!!! 

The above chart from the Bespoke Invest shows how broad based the downturn has been for the US statistical GDP in 1Q 2015. It’s only government spending and inventory that has lifted the statistical GDP to positive.

Nonetheless here is how the mainstream reads the .2% 1Q GDP

From Wall Street Journal’s Real Time Economics Blog: (bold mine)

Strong Dollar, Port Slowdown Weigh on Economic Output: A number of factors pulled overall first-quarter growth lower, including bad weather, a slowdown at West Coast ports, a stronger U.S. dollar, weak global demand and lower oil prices. The single biggest drag was falling exports of goods, which knocked 1.26 percentage points off GDP, the most since the first quarter of 2009. The second-biggest factor weighing on growth was a slowdown in business investment in new structures.

Bad weather and labor strike at West Coast Ports? They seem as rather aggravating circumstance rather than of the real cause. That’s because World Trade has been on a slump since December 2014.

More…

Consumer Spending Slows Amid Severe Winter Weather: U.S. consumer spending slowed in the first quarter, despite lower gas prices and strong job creation. Spending on goods inched up at a 0.2% rate, compared with 4.8% in the fourth quarter. Spending on services grew at a 2.8% pace, compared with the previous quarter’s 4.3%. Spending on housing and utilities contributed 0.59 percentage point to the quarter’s 0.2% growth rate, versus 0.24 percentage point in the prior GDP report. That was offset in part by lower spending on motor vehicles and groceries.

So whatever happened to the popular rationalization of lower gas prices EQUAL spending growth??? Popular wisdom again debunked by reality?

As for job creation—March job gains had been a big miss.

With the energy sector providing the a big chunk of employment gains in the past (EIA), the current downturn in the energy sector due to sustained low oil prices have yet to be factored in. Additionally, energy sector has been highly leveraged (previously accounted for 17% of high yield bond markets), thus sustained pressures on the industry will not only lead to credit problems but likely to the contraction of investments and output. Such will have spillover effects to areas where these industries operate on and to ancillary sectors.

Besides, the quality of jobs is important, a lot of the jobs recently created have been about “waiters and bartenders” or jobs that pay less because they represent the less productive segments of the economy.

Business Investment Drops: Businesses slowed spending in the early months of the year, suggesting U.S. companies remain cautious amid weak global demand and the strengthening dollar. Business investment–which reflects spending on software, research and development, equipment and structures—shrank at a 3.4% rate, after growing at 4.7% in the fourth quarter and 8.9% in the third quarter. The dropoff reflected a slowdown in spending on new structures, driven primarily by the oil sector.

Little investments equal little job growth and spending growth. Record stocks have done little to boost investments.  

Paucity of investments has weighed on corporate earnings (chart from Yardeni.com)

More from WSJ...

Trade Weighs on First-Quarter Growth: Foreign trade subtracted 1.25 percentage points from the first quarter’s 0.2% GDP growth rate. Exports fell at a 7.2% annual pace during the quarter, down from the previous quarter’s 4.5%, while imports slowed to 1.8%. Imports are a subtraction from the GDP calculation, so that dragged down broader growth, though not as much as the previous quarter. A stronger dollar makes U.S. exports more expensive and imports cheaper.

As pointed out above, the strong dollar signifies symptom of central bank policies. The ongoing slowdown in global trade instead reflects more on what I call as the “periphery to the core” phenomenon of bursting bubbles. 

Multiple bubbles around the world has been under pressure. And those hissing bubbles have fueled an economic-financial market feedback loop between Emerging Markets and Developed Markets whose eventual outcome will be a global recession or a crisis.

As I projected in February 2014:

Even when the exposure would seem negligible, if the adverse impact of emerging markets to the US and developed economies won’t be offset by growth (exports, bank assets and corporate profits) in developed nations or in frontier nations, then there will be a drag on the growth of developed economies, which would hardly be inconsequential. Why? Because the feedback loop from the sizeable developed economies will magnify on the downside trajectory of emerging market growth which again will ricochet back to developed economies and so forth. Such feedback mechanism is the essence of periphery-to-core dynamics which shows how economic and financial pathologies, like biological contemporaries, operate at the margins or by stages.

And part of such feedback loop dynamics has been manifested on the US dollar which current strength signifies its temporary safehaven attribute.

Additionally, the boost in inventories (chart from Zero Hedge) which rescued the 1Q GDP from contraction will have future implications. Unless demand picks up, the above will mean added downside price pressures on the economy from which the mainstream will read as “deflation”. This may also mean lesser production in the future.

Finally as noted in the first chart, final demand has been down by 2.8%, analyst Jeff Snider provides the possible ramifications: (bold mine)

There is more to say about GDP itself, especially since GDP ex inventory was about -3% again, but there are worse and more important indications than even that. The Final Sales accounts strip out some of the artificial and beneficial (for GDP’s view on growth) aspects and focus solely on the private economy at the point of sale. That means inventory is extraneous in terms of the private economy in the moment; the purchaser view also does not infuse imports with a negative sign, as we want to know how much private “demand” actually exists before entangling geography and currency systems in analysis.

Of Final Sales to Domestic Purchasers, the statistical problems are evident straight away in Q1 2015. Real Final Sales, taking account of the official version of “inflation”, were $31 billion more than Q4 2014. However, Nominal Final Sales were $33.5 billion less quarter to quarter. Not only are the signs reversed, these are enormous discrepancies in that direction. Under ideal circumstances, such would be great fortune for the economy and a welcome respite from its monetary repression (buying more and paying less for it), but the unusual nature of this arrangement again suggests more statistical problem than actual economic benefit.

Seeing a negative nominal growth rate in final sales is highly unusual, which might as well be expected given that we have been under some form of an “inflation” appeal of monetary theory since 1965. In the twin final sales accounting, Final Sales of Domestic Product, there have only been four instances of a negative quarter since 1958. Three of those were during the Great Recession, and Q1 just produced the fourth!

We can argue about the official inflation calculation as to how bad everything might be, but a negative nominal rate removes the doubt.  As if to confirm that dire interpretation, in Final Sales to Domestic Purchasers there have only been five negative quarters since 1958 (with Q2 1980 being the fifth/first).

The rarity of these occurrences and their comprehensive association with nothing but recession is concerning about the degree of recession vs. recovery that may have, to this point, existed concurrently. In other words, the balance may be (may have been) shifting(ed) in the past year or so…

The economy is like a boxer being dazed from constant blows, getting knocked down (“unexpectedly”) several times. The fact that the boxer has so far re-risen from each does not suggest that the boxer is now better prepared to handle the continued onslaught, that the next blow will not be the knockout. In fact, repeated knockdowns advise the danger of a knockout has only increased; at some point the economy won’t get back up.

Record stocks in the face of record imbalances at the precipice.