Is US Gross Domestic Income 'Scary?'

Let’s face it: Bad news sells. Doomsday scenarios often capture widespread popular attention particularly well. We live in an age of insatiable demand for content from the financial press. I’ve noticed that many of their websites have adopted a very breezy style that increasingly features headlines aimed at grabbing attention by arousing fear, so that the reader will be motivated to read the often-much-less-alarming story. Even BloombergBusiness seems to be adopting this approach, which I believe was pioneered by Henry Blodget’s Business Insider website. A case in point is an 8/27 BloombergBusiness article titled "The Scary Number Hiding Behind Today’s GDP Party." Here are the first two paragraphs:

“The federal government today released two very different estimates of the U.S. economy’s growth rate in the second quarter. The one that got all the attention was the robust 3.7 percent annual rate of increase in gross domestic product. Not many people noticed that gross domestic income increased at an annual rate of just 0.6 percent.

“That’s a big discrepancy for two numbers that should theoretically be the same, since they’re two ways of measuring the same thing: the size of the economy. If you believe the GDP number, you’re happy. If you believe the GDI number, you’re thinking the U.S. is skating close to a recession.” A closer inspection presents a much less worrisome view:

(1) Small tracking error. The quarterly GDP and GDI numbers tend to be volatile and prone to significant revisions. Indeed, Q2’s growth rate for real GDP was revised up from the preliminary 2.3% (saar) to 3.7%. The growth trends in both real GDP and GDI are more stable on a y/y basis. The former was up 2.7% y/y during Q2, while the latter was up 2.2%. That’s not much of a difference and is consistent with the tracking error that the two have had for years. Since 2010, both of these growth rates have been around 2.5%. Since the recovery began in Q3-2009, real GDI is actually up slightly more than real GDP, i.e., 15.3% vs. 13.7%.

(2) Statistical discrepancy. In current dollars, the quarterly difference between the GDP production and the GDI income measures of overall economic activity has been very small, rarely exceeding +/-2.0% of GDP. This statistical discrepancy tended to be mostly positive from the late 1940s through the mid-1990s, and mostly negative since then.

(3) The big driver. Labor compensation has the biggest share of National Income (i.e., GDI plus net income receipts from the rest of the world less depreciation), accounting for 61.9% of it during Q2. It includes wages, salaries, and supplements. On a y/y basis, inflation-adjusted compensation rose 3.8% y/y during Q2, with real wages and salaries up 4.0%. These are solid growth rates in real income earned by workers, which is the main driver of consumer spending and the overall economy.

Today's Morning Briefing: Alphabet Soup. (1) GDP, GDI, EIP, ETFs, HFTs, & UFOs. (2) Pure air and water. (3) Iceland, Ice Age, and the Ice Man. (4) The financial press is going Blodget. (5) BloombergBusiness finds a scary number. (6) A small statistical discrepancy. (7) Consumer incomes and spending growing robustly. (8) The role of ETFs and HFTs in last week’s market mayhem. (More for subscribers.)

Black Holes & the Stock Market (excerpt)

According to an 8/25 Newsmax article titled “Stephen Hawking: Black Holes May Have Exits After All,” the famed physicist now believes that black holes may not be the no-exit-ever spaces they’re thought to be. In his latest mind-bending theory, Hawking postulates that unfortunate space travelers could escape from black holes after all, but they won’t be able to go home to their own universe. That’s a bummer. On the other hand, Hawking reassuringly concluded: “If you feel you are in a black hole, don’t give up. There’s a way out.” He presented his views in a lecture on Monday at Stockholm University.

Stock investors are fretting that they fell into a black hole starting last Thursday, with the S&P 500 plunging 10.2% in an almost vertical line through Tuesday’s close. Looking at the chart on Monday, I concluded that the market should find support at 1862.49, which was the low on October 15, 2014, the day before the “Bullard Bounce” commenced. On Tuesday, the market closed on the day’s low at 1867.80. Yesterday, it rebounded 3.9% to close at 1940.51. This could be the beginning of the “Bullard Bungee Rebound.”

Falling below the October 15, 2014 low would be bad, but not as bad as entering a black hole. So far, the market’s selloff looks more like a wicked correction. Yesterday, I attributed it to algorithms and unfair trading tactics used by high-frequency trading (HFT) firms rather than to panic selling by individual and institution investors. Today, I would add that ETFs contributed to the recent debacle. There were mini flash crashes in many ETFs because liquidity dried up as market makers and broker-dealers had no idea what a fund’s holdings were really worth.

The current correction won’t turn into a potential black hole unless the S&P 500 drops to 1704.66, which would mark a 20% bear-market decline from the record high of 2130.82 on May 21 this year. That would be the lowest level since October 15, 2013. That might feel like a black hole, but the S&P 500 would still be up 151.0% since the start of the bull market on March 9, 2009. It would still exceed its previous cyclical high on October 9, 2007 by 8.5%.

That would be cold comfort for most investors who would feel lost in space, believing that Mission Control at the Fed and at the other major central banks can no longer revive the bull market. The 8/26 BloombergBusiness included an article titled “Investors’ Central Banking Saviors Caught Naked as Stocks Slide.” The key point was: “Where have all the heroes gone? The central bankers who saved the global economy in 2008 and kept its anemic recovery from stalling now increasingly lack the tools to respond if the worldwide slump in equities gets much worse.”

Maybe so. But there’s more to the global economy than meddlesome central bankers. There’s also the underlying resilience provided by aspirational consumers, hard-working employees, and innovative entrepreneurs around the world. They’ve done remarkably well for themselves in recent years, with lots of benefits accruing to our economies, despite the meddling of all the central bankers and central planners. Maybe the market bottomed on Tuesday.

Today's Morning Briefing: Black Hole Theories. (1) Stephen Hawking says there’s a way out of black holes. (2) Bullard Bungee Rebound. (3) We blame HFTs and ETFs for exacerbating the recent unpleasantness in the US stock market. (4) Can stock prices move higher if the central banks have lost their magic powers? (5) Dow Theory and Death Crosses. (6) Our mantra: “USA, USA, USA.” (7) Gasoline windfall literally driving the economy. (8) Dudley and his chums are in a black hole without an exit. (9) Fed’s space-age jargon full of “escape velocity” and “lift off.” (10) Reality is probably distorted in black holes. (11) Focus on market-weight-rated S&P 500 Energy industries. (More for subscribers.)

Can US Economy Weather the Global Storm? (excerpt)

The latest batch of US economic indicators certainly looks upbeat. The Consumer Confidence Index (CCI) rose sharply during August, led by its present situation component to the highest reading since November 2007.

Most impressive is that the percentage of respondents to the CCI survey who agreed that jobs are hard to get plunged from 27.4% during July to 21.9% this month, the lowest percentage since January 2008. This series is highly correlated with the unemployment rate, which was 5.3% during July. The CCI series suggests that the jobless rate could soon fall below 5%.

By the way, this also suggests that the Misery Index, which is the sum of the unemployment rate and the inflation rate, will continue to fall to new lows for this cycle. In the past, bear markets were associated with a rise in the Misery Index. On the other hand, cyclical lows in the Misery Index marked the tail ends of bull markets.

If you need a couple more indicators to restore your confidence in the US economy, take a look at the ATA trucking index. It rebounded smartly during July, and is almost back to its record high during January of this year. Intermodel railcar loadings rose to a record high in mid-August. “Choo-choo” isn’t the sound of China sneezing.

Today's Morning Briefing: The Iceman Cometh. (1) Albert Edwards is the Iceman. (2) Global freezing. (3) Another 2008 crisis is imminent eventually. (4) Cold summer followed by warm winter for stocks? (5) Blame HFT robots, since most humans are at the beach. (6) It’s good to be plugged in, to front-run everyone else. (7) VIX soars, while Treasury yields meander. (8) Must be getting close to a bottom for commodities. (9) People say US labor market improving significantly. (10) Transportation activity indicators rolling along. (More for subscribers.)

Retracing the Bullard Bounce (excerpt)

The S&P 500 closed at 1893.21 yesterday. That puts it down 11.2% from its record high on May 21, down 8.0% ytd, and down 5.2% y/y. There was some chatter about the PBOC lowering the required reserve ratio for banks over the weekend, which didn’t happen. Instead Xinhua, China's official news agency, reported on Sunday that under the new rules, China’s giant pension fund will be allowed to invest up to 30% of its net assets in domestically listed shares. No one was impressed: The Shanghai Composite Index plunged more than 8% yesterday. The Chinese media dubbed the collapse “Black Monday.” It was dark in New York as well.

During the first couple of weeks of October last year, the stock market was having another taper tantrum as the Fed was on course to terminate QE by the end of the month. The market rebounded dramatically on October 16 following a comment from FRB-SL President James Bullard that the FOMC should consider extending its bond-buying program beyond October due to the market selloff, waiting to see how the US economic outlook evolves. Yet in his interview with Bloomberg News, he also said he still believed that the FOMC should start raising the federal funds rate in March of this year.

QE was terminated on schedule, and the S&P 500 continued to rally to an all-time record high of 2130.82 on May 21. Nevertheless, many investors have been nervous, particularly the ones who’ve noted the strong correlation between the Fed’s balance sheet and the S&P 500.

This time, Bullard might have contributed to the recent panic selloff by exacerbating the market’s tightening tantrum. On Friday, as the stock market was tanking following Thursday’s plunge, Bullard, who is one of the most talkative of the Fed’s talking heads, was interviewed on SiriusXM Business Radio. He suggested that despite the turmoil in the financial and commodity markets, the FOMC should proceed with its first rate hike at the committee’s September 16-17 meeting. Bullard said the Fed doesn’t react to financial markets directly unless they influence the economy. While crude oil prices slumped to the lowest level since 2009, he said the bulk of the decline over the past year has been driven by increased supply rather than lower global demand.

Earlier on Friday, the Richmond Fed said its president, Jeffrey Lacker, will give a speech September 4 titled “The Case Against Further Delay.” Yesterday, Lockhart stuck to his guns saying he still expects the FOMC to raise short-term interest rates in the next few months, even as he recognized some of the stresses facing the US economy and financial markets.

So what will the FOMC decide to do at its September meeting? Given the turmoil in financial and commodity markets, Fed officials are likely to postpone a rate hike until their December 15-16 meeting. By then, there might be less commotion. Of course, another possibility is that one-and-done will be none-and-done this year, and maybe even next year.

Today's Morning Briefing: Retracing the Bullard Bounce. (1) Bullard Bounce without Bullard? (2) From taper tantrum to tightening tantrum. (3) From one-and-done to none-and-done? (4) The famous airplane scene in “Almost Famous.” (5) Maybe commodity prices are near their lows after falling so far over the past year. (6) Maybe the worst is over for non-dollar currencies. (7) Is it too late to panic? (8) The alternatives to stocks are mostly near-zero interest rates. (9) Global economy is chronically weak, but recession still seems unlikely. (10) Forward earnings remain near record highs for S&P 500/600/400. (More for subscribers.)

Another Panic Attack or the Start of a Bear Market? (excerpt)

There have been lots of panic attacks since the start of the bull market in early 2009. The first four of them occurred from the second through the fourth years of the current bull market, and they were full-fledged corrections. They were all triggered by worries that a recession was imminent, with anxiety focused on three major and varying concerns: a double-dip in the US, a disintegration of the Eurozone, and a hard landing in China--all having the potential to cause a global recession either individually or in combination. When those fears dissipated, relief rallies ensued.

This year started with lots of concerns about a Grexit that would destabilize the Eurozone. That issue seems to have been resolved benignly for now. Earlier this year, there were concerns about a soft patch in US economic growth that is no longer an issue either. The latest selloff was mostly triggered by the relatively small devaluation of China’s currency two weeks ago. That immediately heightened fears that China’s economy is in much worse shape than had been widely recognized.

That new perception was confirmed Friday morning by the release of China’s Caixin/Markit Flash M-PMI for August showing a drop to 47.1, the lowest since March 2009. I’ve observed many times before that bear markets are caused by recessions when corporate profits decline along with the economy. Are we there now as a result of a hard landing in China? I expect that the global economy will continue to grow albeit at a subdued pace with the US economy growing solidly enough to offset weakness elsewhere around the world.

Today's Morning Briefing: Bad Break. (1) Another panic attack followed by another relief rally? (2) Or, is this the start of a bear market? (3) Technical picture is very ugly. (4) One of the bull market’s three major concerns rises to the fore. (5) China’s syndrome. (6) Is there a credit crunch out there? (7) Have central banks really run out of ammo? (8) Tough transition or hard landing for China? (9) The IMF’s spin on China. (10) Global recession? (11) No sign of earnings recession so far. (12) Home sweet home. (13) Bye-bye buybacks? (14) “The Man From U.N.C.L.E.” (+) (More for subscribers.)