Stéfane Marion and his team at National Financial Group came up with another fascinating unique analysis of economic relationships. To read in conjunction with yesterday’s post BUSINESS INVESTMENT COMING BACK. IS EMPLOYMENT NEXT? Rising employment would do wonders to final demand.

Real GDP shattered expectations in Q4 by surging 5.7%, the biggest increase since 2003 Q3. Most of the rise came from inventory accumulation which accounted for 60% of the growth (or 3.4 percentage
points). Final domestic demand was up only 1.7%, a little softer than the 2.3% growth registered in Q3. Given this development, it is important not to get carried away by the headline GDP number. Inventories will only be absorbed if final domestic demand picks up in the coming months.

Fortunately, there is some indication of a revival in the private sector. As today’s Hot Chart shows, business sector nominal GDP (a proxy for top-line) surged 7.2% in Q4. This type of growth was more than enough to prod corporations into increasing their volume spending on machinery & equipment by the most in four years (+13.3%). As shown, business investment in equipment & software has been a harbinger of job creation in each of the past recoveries.




Well, the first round goes to the “V”! Since last spring, economists have been debating on the shape of the recovery. Roubini saw a L, at best, while others said U, V or W. As Bespoke Investment chart shows, it is definitely not a L nor a U. The nice thing is that the debate will now be focused on fewer letters although other shapes will not doubt start to be invoked. How many W shapes are there?

While the ultimate pace of the economic rebound continues to be

GDP 012910

debated, GDP in the fourth quarter rose 5.7% (expectations were for growth of 4.6%), which was the fastest pace in six years.  Granted, this growth follows an even bigger decline of 6.4% in the first quarter of 2009, but at least it’s a start.  Judging by the performance of equities in the fourth quarter, and the earnings reports we’ve seen so far, we already knew the fourth quarter was strong, the big question is whether or not this growth will continue in Q1.  Based on what we’ve seen so far in terms of guidance, companies seem to have a positive outlook.

Meanwhile, David Rosenberg keeps whistling the same tune:

First, the report was dominated by a huge inventory adjustment — not the onset of a new inventory cycle, but a transitory realignment of stocks to sales. Excluding the inventory contribution, GDP would have advanced at a much more tepid 2.2% QoQ annual rate, not really that much better than the soft 1.5% reading in the third quarter.

Second, it was a tad strange to have had inventories contribute half to the GDP tally, and at the same time see import growth cut in half last quarter. Normally, inventory adds are at least partly fuelled by purchases of foreign-made inputs. Not this time. Strip out inventories and the foreign trade sector, we see that domestic demand growth in the fourth quarter actually slowed to a paltry 1.7% annual rate from 2.3% in the third quarter. Some recovery. (…)

Third, if you believe the GDP data — remember, there are more revisions to come — then you de facto must be of the view that productivity growth is soaring at over a 6% annual rate. No doubt productivity is rising — just look at the never-ending slate of layoff announcements. But we came off a cycle with no technological advance and no capital deepening, so it is hard to believe that productivity at this time is growing at a pace that is four times the historical norm.(…)



An index level at or below -0.70 typically has indicated negative U.S. economic growth. We have had –.61 in December, –.39 in November and –.83 in October. There is a correlation of about 80% between the Chicago Fed Index and q/q GDP change.

One has to wonder what the FOMC statement would have been had they seen this stat. They might have refrained from changing the statement from “economic activity is likely to remain weak for a time” (as in the Dec 16 statement) ,to yesterday’s “the pace of economic recovery is likely to be moderate for a time.” I don’t know what the Fed has seen in the past month to become more upbeat. It seems to me that the last employment and housing numbers were weak enough to prevent such change in tone.

Led by declines in employment-related indicators, the Chicago Fed National Activity Index decreased to –0.61 in December, down from –0.39 in November. Three of the four broad categories of indicators that make up the index moved lower, although both the production and income category and the sales, orders, and inventories category made positive contributions.

In contrast to the monthly index, the index’s three-month moving average, CFNAI-MA3, increased slightly to –0.61 in December from –0.68 in November. December’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend; but the level of activity
remained in a range historically consistent with the early stages of a recovery following a recession. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.

Thirty-six of the 85 individual indicators made positive contributions
to the index in December, while 48 made negative contributions.
Forty-four indicators improved from November to December, while
41 indicators deteriorated. Of the indicators that improved, 16 made
negative contributions. The index was constructed using data available
as of January 21, 2010. At that time, December data for 52 of
the 85 indicators had been published. For all missing data, estimates
were used in constructing the index.




Yesterday, the Federal Reserve acknowledged that the private sector was beginning to contribute to economic growth through increased image business investment in machinery & equipment. The just released
data on U.S. durables confirms this. Shipments of nondefence capital goods rose 2.2% in December, the fourth consecutive rise and is the largest monthly increase since March 2008. This is important since this component is very highly correlated with business investment.

As today’s Hot Chart shows, shipments of nondefence capital goods are picking up much faster than they did after the 2001 recession. Back then, it had taken no less than three years for shipments to finally start rising. It is encouraging to see that recent improvement in businesses confidence is translating into action. History shows that investment must come back before job creation materializes.

NBF Financial


US TAX INCREASES: An Economic Time Bomb

Pete Du Pont in the WSJ lists all the tax hits for Americans in 2011. He then quotes Arthur Laffer who predicts an “economic collapse” in 2011 as a result of Americans anticipating many of this increases and moving income forward in 2010. In my view, what it will do is boost Q4 2010 income, softening the blow for 2011. The big crunch will come in 2012. This remains very frightening, especially since there is more to come…

(…) next year there will also be substantial tax increases for a great many Americans. The first reason will be the expiration of the Bush tax cuts . The top personal income tax rate will rise next Jan. 1 to 39.6% from 35%, a hike of nearly one-eighth. The dividend tax rate will rise to 39.6%, more than 2½ times the current 15%. And the capital gains tax rate will rise by a third, to 20% from 15%. If the House health care bill had passed, all three of these rates would have risen to 45%.

The estate tax, which fell to zero this year under the Bush tax cuts, will return in 2011–or sooner, if Congress acts to restore it. Another likely tax increase will be on the income of private equity and hedge-fund managers, from the capital gains rate of 15% to the new higher income tax rates. It has already been passed by the House and is supported by the Obama administration, as is an additional 10-year, $90 billion tax on banks aimed at "rolling back bonuses for top earners." It would affect some 50 banks, insurance companies, and large broker-dealers.

Meanwhile a number of last year’s tax deductions have disappeared due to the failure of Congress to extend them into this year. The tax deduction for state and local sales taxes is one; the deduction for college tuition and fees is another; and the 50% write-off for small businesses for capital purchases–equipment, machinery or building a new plant–has disappeared as well, which will have a negative effect upon the construction of new business operation facilities.(…)

Or as economist Arthur Laffer wrote in his January Economic Outlook, we "cannot have a prosperous economy when government is overspending, raising tax rates, printing too much money, over-regulating and restricting the free flow of goods and services across national boundaries." We are, in his words, simply "moving in the wrong direction." (…)

Full WSJ op-ed



ICSC-Goldman’s chain store same-store-sales fell 2.5% last week. Even though January is a low volume month, the trend is definitely worrying. Chain store sales are barely ahead of their deeply depressed levels of last year.

Even though January is a low volume month, the trend is definitely worrying. Chain store sales are barely ahead of their deeply depressed levels of last year.




Dennis Gartman raises an interesting point. The effective tax rate is as low as it gets and Q2 take-home-pay will likely be lower than in 2009. Normally, these things smooth themselves out over a year. But current economic conditions are so fragile that any short-term negative for the US consumer could be significant.

The problem this year is that retail sales depend upon the yearly flow of tax rebates to the public for a round of ramped up retail sales. This year, however, that is not going to happen, or if it happens it will be demonstrably smaller than in the past for the simple reason that less taxes were withheld last year from millions upon millions of paychecks because of a change in the tax law and because of the stimulus program itself.

image As we understand it, the stimulus program lowered federal taxes that the nation’s workers paid, which ended in more take-home pay for
those workers. Many taxpayers… indeed almost certainly most hourly workers… will find that when they file their taxes they will receive a much smaller “rebate” than in past years. Some may even find that rather
than a rebate they shall actually owe taxes.

The American Payroll Association forecasts that the average withholding last year was reduced by $400, and it is that amount that their “rebate” will be reduced this year… a not inconsiderable sum when aggregated across an entire economy. Retail sales, we fear, shall fall rather materially, by this amount, or even more, for if the “rebates” are small enough we suspect that a great number of workers will chose to simply save this smaller amount of money rather than spend it upon something small and trivial.



The US economy is in an inventory rebuilding phase and Q4 2009 GDP growth is now expected between 4% and 5%. However, the December employment image report was a reminder that final demand has yet to convincingly rebound.

We must not lose sight that 2 major factors will likely combine during the next 6 months to prevent a double dip:

  1. The US census will boost employment by some 500,000 during the first 5 months.
  2. The US government has ample ammo to keep feeding the economy. Only one third of the $787 billion stimulus included in the American Recovery and Reinvestment Act has been spent so far, leaving $520B in available funds, representing 3.5% of GDP. The CBO projects that the direct and indirect effects of ARRA will peak in the first half of 2010, coinciding with the impact of the census.