At the beginning of every quarter Wall Street places its overly optimistic
GDP forecasts on parade. And by the end of the quarter, those same carnival barkers
line up a myriad of excuses as to why the numbers fell short. Port strikes, a
stronger dollar and snowier winters (caused by global warming?) are among
their current favorites.
But the anemic data in the first quarter of 2015, followed by the not so
much better data in the first month and a half of Q2, has rattled the
optimism of not only the usual Wall Street cheerleaders, but even many at the
Federal Reserve.
Historically, when the Fed saw no growth on the horizon, they would doctor
up a monetary tonic in an attempt to soothe the economic malaise. But since
interest rates are already at zero percent, it has left Fed officials
desperate for another scheme to dig the economy out of the economic mud. So
they have now found temporary relief in a simple phrase: It's a phenomenon
economists are calling "Residual Seasonality."
What is residual seasonality?
Economists like to look at economic data in sequential quarters. Since
economic activity varies greatly from the fourth quarter of a year to the
first quarter of the next, the Bureau of Economic Analysis (BEA) makes
adjustments to allow the quarters to be more comparable. For instance, the
Holidays in the fourth quarter spur on consumer spending and deter corporate
layoffs. Economists realize this and try to balance the quarterly numbers
with adjustment to make up for this seasonality. They call these seasonal
adjustments.
Feeding off this, The San Francisco Fed came out with a paper authored by
economist Glenn Rudebusch, which seeks to resolve what he terms as; "The
Puzzle of Weak First-Quarter GDP Growth". And the conclusion is: there
was no slowdown of economic growth in the first quarter...the BEA just didn't
seasonally adjustment enough. Quoting Mr. Rudebusch
"The official estimate of real GDP growth for the first three
months of 2015 was shockingly weak. However, such estimates in the past
appear to have understated first-quarter growth fairly consistently, even
though they are adjusted to try to account for seasonal patterns. Applying
a second round of seasonal adjustment corrects this residual seasonality.
After this correction, aggregate output grew much faster in the first quarter
than reported".
Their solution for this first quarter puzzle is residual seasonality.
And the name of this new GDP calculation: GDP plus!
And as you can imagine--when the proper adjustments are made--researchers
at the central bank's San Francisco office said the economy in the first
quarter was "substantially stronger" than the government reported
last month. After adjusting the data, they found gross domestic product
actually expanded at a 1.8 percent annualized rate, versus the 0.2 percent
gain initially estimated by the government last month.
But, the BEA's own data shows that first quarter GDP was higher than the
second quarter, 4 out of the last 10 years and 2 out of the last 3 years.
However, the government views this as Prima Facie evidence that all the first
quarters' growth from here to eternity needs to undergo a drastic spring
makeover.
And no need to fear, if the data still looks weak after the double
adjustment they can always triple adjust it. That's the beauty of GDP
plus...it's based on simple mathematics--you can continue to add to the GDP
number until you get the desired result. Even to the point in which a Chinese
government official becomes uncomfortable.
In sharp contrast, The Atlanta Fed--who I imagine is the Black Sheep of
the Federal Reserve family--has their own method of calculating GDP called
GDPNow. GDPNow provides now-casts of GDP and its subcomponents on a regularly
updated basis. The GDPNow model forecasts are nonjudgmental and
non-subjective, meaning that the forecasts are taken directly from the
underlying statistical model. GDPNow doesn't look for pluses and excuses. And
the Atlanta Fed's GDPNow Model nailed that weak first quarter GDP number.
The objective GDPNow model forecasts real GDP growth for the second
quarter of 2015 at just 0.7 percent; following up on what will become a
negative number upon the official BEA revision.
But here is where it gets really interesting: with second quarter GDP also
looking extremely weak, there is now a movement to bypass the GDP read all
together. Recently, Wall Street carnival barkers and Keynesian economist are
suggesting that GDP be replaced by employment and payroll numbers as the true
barometer for economic growth. This is being suggested primarily because the
surging number of part-time workers due to the Affordable Care Act has made
the Non-Farm Payroll reports look much better of late.
And why should all the fun be limited to Fed-heads and economists? We see
corporate America joining the party with their newly touted term
"Constant dollars". When the dollar was declining against most
other currencies-as it has done for the majority of the time since the 1985
Plaza Accord--CFO's didn't say boo about the positive effects of a weakening
currency upon Multi-national Corporations. But now that the strong dollar is
working against them they also want to make adjustments for "residual
currency translation". I guess if you take out and add in whatever
numbers you desire, you can make any data point portray whatever result you
seek. Government first did this with CPI data with much success. And now that
growth is AWOL they are tying it with GDP.
We have officially entered the final phase of every market bubble; it is
called denial. Wall Street refuses to admit that despite 7 years of QE and
ZIRP; the economy is simply not growing, the wealth gap between the lower and
upper classes has surged and the middle class is going extinct. They are also
trying to deceive themselves, and you, into believing stocks at these levels
are fairly valued. Therefore, when they fail to get the economic data that
fits with their delusional narrative...they will find a reason to just change
it. The good news is the populace currently has access to the real numbers
before they become favorably revised. The bad news is, official data will
soon be "adjusted" right from the start.
