Monday, August 3, 2009

Further On GDP - And Stocks

Delving deeper into the GDP numbers just released it becomes quite easy to discern a pattern and possibly make a prediction about the direction of corporate profits.

The following figures are in current dollars, at seasonally adjusted annual rates.

During the first two quarters of 2009..
  • Personal consumption expenditures (that's about 70% of GDP): -$21 billion.
  • Non-residential fixed investment (that's structures, equipment, software, etc.):-$481 billion.
=> Businesses slashed their investment far faster than consumers reduced their spending. Corporate profits (finance excluded) benefited from cost-cutting, not growth in sales.

Furthermore, in the same period..
  • Private inventories were slashed by a cumulative: -$283 billion.
=> Businesses sold a lot out of inventory already in stock, as opposed to making new items. That's another short-term boost to the bottom line.

Both of the above positive effects cannot, and will not, last long. Therefore, the crucial question is what happens with consumer spending. My thinking is not to expect a turnaround any time soon; indeed, I think things are going to get significantly worse in the next several quarters. Jobs are being lost in the hundreds of thousands each month and hours worked for those still employed are at the lowest level (33 hours/week) since at least 1964.

Bottom line: corporations can "save" earnings for a few months by slashing spending but in the end the consumer's behavior will determine the top line (sales). And that's where it all plays out..


  1. Thanks for your update Hell...

    I wonder how much longer consumer spending can continue? With the success (if you want to call it that) of the "cash for clunkers" program, I suspect Uncle Sam will be performing other stunts to keep the lemmings spending and going further into debt.

    Certainly borrowing billions from China to goad people into taking out new car loans (or whatever else) won't do anything for the long term, but it will keep goosing the quarterly GDP numbers.

  2. Newbie question = If corporations are selling off their inventory and not restocking, what exactly are they selling? Did they have that much excess inventory that they can sell off inventory 2 years into this recession? Thanks, your posts are always thoughtful.

  3. The collapse of Non-residential fixed investments will have a serious effect on productivity. Without new equipment and software efficiencies will suffer.

    The other thing that will effect profits is the difference in prices for natural resources and wholesale products and the lack of pricing power for corporations.

    As wages stagnate and demand stays low revenue will drop. As China invests more into natural resources cost of goods for companies stays high.

    My big question Who is buying stocks?

  4. Hell:

    I just wanted to point out that someone else is raising the issue that you brought up a few posts ago:

    CIT-PIMCO deal looks like "fraudulent conveyance."

    What is interesting about this is that the Credit Slips blog is the place where a lot of bankruptcy attorneys hang out. So it looks like you might be in good company after all.

  5. Great link there Okie.

    debra, we don't need Government wiping our butts, we got corporations that are reaming us.

    love this quote:
    "Low frequency, high severity events are also difficult for us to process – look at how much we invest fighting air piracy versus the sacrifices we are unwilling to make on drunk driving or domestic firearm violence."

    Analogous to all the warmongering over Muslims because a maniac living in a cave that killed 3,000. Yet the same mongers would most likely have stood in the way of mandatory airbags that probably would have saved 300,000 over over 20 years.

  6. The economy is now firmly in the grips of Murphy's Law. What I distilled from Hell's post, and from my own reviews of the numbers, is there is absolutely no margin for error, none. What's more, any significant shock to the system, endogenous or exogenous, will
    send the economy absolutely reeling. If something can go wrong it will.

  7. Re: selling out of inventories.

    There are always inventories around; but you raise an interesting issue. In fact, before the recession/depression the inventory to sales ratio had been coming down for years due to major improvements in logistics technology and processes.

    This means the crisis worked back to the manufacturers faster than ever, forcing them to cut production deeply and suddenly.


  8. Love that link to unconscionable math, Okie...
    Makes me think of that film that got me retching two years ago, the Harvard med school applicant trying to finance his tuition fees through a Las Vegas gaming scam.
    So... who or what do you have faith in when EVERYBODY seems to be corrupt ? Should you calculate the probabilities (I think that Pascal was the inventor of probability theory, but I could be wrong...) to decide just how much you could come out ahead by believing in God, or science, or whatever ?
    The insurance companies are PUNISHING their clients, once again.
    Gotta understand from a psychological standpoint just how many kicks the social body gets from punishment, over other investments.

  9. I believe the 4th quarter will be the one in which it is widely acknowledged we are firmly in Greater Depression II.

    However, this ain't your grand-daddy's Depression. It is far worse as the USD had been abused beyond repair.

    I see the USD going hyper over the course of 2010 as it becomes "rejected by all" as the world reserve currency. US Empire collapse, end of 2010.

    Joe M.

  10. Love the blog!

    I gotta disagree with Joe though. It'll be deflation for quite some time still.

  11. Thanks for the link Okie. I like your Taunter fellow very much, he is very very clever... Deb Okie's link is a wonderful example of how numbers are a window into problem for those who speak that language ;-)

    A couple of thoughts:

    A. 1% of patients spend 25% of all money in health care and 5% spend 50%. What do people think this all means???... Except for those who live on a flat earth or linear world, and you know who you are!

    B. I used the same Monty Hall example with Marcus the other day trying to explain the flaw in human risk heuristics when it comes to our risks of association with groups vs. going it alone. I never got a response one way or the other.

    ... and fwiw as a piece of personal free friendly medical advice: framing errors- which is what the Monty Hall problem really exposes... in fact as I think on this the Monty Hall issue is really the same "perception" issue Hell is always reminding us about- anyway framing errors tend to be at the root of most bad medical advice you will see/get. Remember this if something "smells funny".

    B. If ever there was a clearer illustration of why universal coverage cost Massachusetts even more money than they were spending before they had it and why universal coverage will cost the US even more, I haven't read it.

    just curious, what % of our GDP do you think health care should be???

    C. Along those same threads, the link clearly illustrates why we need to ration health care (at least to me). I posted something similar on Sudden Debt's Spawn-Off if you want numbers.

    It is just my opinion (though I suspect you might agree???) that rationing health care covertly (as your link reminds us with covert rationing doozies such as denying coverage for misspelling one's address) is not the best way to ration health care as a society.

    Indeed there does seem (at least to me) much better ways of rationing health care. Further the methods by which we might ration care OVERTLY have nothing to do with whether we deliver care through public or private institutions... Of course it has everything to do with the issue of trust. But I am sure that even you and I can agree that some on this blog will never trust/cooperate with anyone/anything they do not understand ;-)

    Anyway, again,thanks for the link

  12. @ Thai:

    B. If ever there was a clearer illustration of why universal coverage cost Massachusetts even more money than they were spending before they had it and why universal coverage will cost the US even more, I haven't read it.

    Massachusetts does not have universal health care; it has a universal mandate to buy health insurance. The two are not the same. Furthermore, what I argue for is a non-profit, public-funded care for all Americans. The larger the risk pool, the less it costs for each participant in the pool.

    You also need to understand that the word "rationing" is being brought up by the Republicans to scare people away from the "public option." As though health care is not rationed now.

  13. Okie, be careful about the difference between cost per person and total spending.

    We may get the cost per unit down by doing more, but it is still spending more.

    Some already object we spend too much. I will let you argue with them as to the correct % of GDP we spend on health care.

    But if you want to spend more, please go ahead. I really wouldn't mind the option of being able to afford private school for my kids ;-)

  14. Thai, I am not an obscurantist.
    I read through those numbers, and I am one of the few people left on this earth probably who actually sits down and balances my checking account. I keep all those slips. I do this by hand, and not on the computer, because...
    (I do use a calculator, but I have had occasional misbouts with the calculator which induced... ERRORS, like you know ?)
    So, simple maths, I does them.
    And I DID understand the maths involved in Okie's link, Thai. Promise.
    But... Okie's author was underscoring the very point that I make here : when you put people BEHIND the numbers, and the statistics, their faces disappear, and then you become capable of doing some pretty monstrous things, Thai, that you would have a hard time doing if those people's faces materialized for you behind every number.
    That's what the author was doing, materializing the faces.
    Admit that you would feel pretty uncomfortable talking about RATIONING with the individual faces in front of you, wouldn't you ?

  15. re: "Admit that you would feel pretty uncomfortable talking about RATIONING with the individual faces in front of you, wouldn't you ?"

    Absolutely "yes", and absolutely "No", it depends who I was talking with.

    One of the more interesting aspects of being an ER physician is observing the incredible diversity of how other cultures deals with this issue. And it is quite clear from my time in the ED that many people all over the world understand this issue quite well and are willing to accept it, where they think rules/approaches are fair.

    Americans seem to understand this issue worse than others and I have wondered why for many years.

    I often suspect the basic issue is diversity in the broadest sense of the word (I do not just mean racial diversity). Think about just how diverse America is- indeed the protection of that diversity is inscribe in our constitution.

    And where groups are truly diverse, teamwork and cooperation are very difficult to achieve.

    Where patients views are truly different from my own, it is hard to find common ground.

    And in a world where physicians are not god, we let the patients therefore decide what they want regardless of the cost

    But I might add I do think the people who have tried to turn number crunchers into monsters are just as much to blame for this mess as those who live by numbers. As this issue "is what it is" and pretending otherwise does not change the reality of it one bit.

    A rose by any other name might not smell as sweet, but we both know it is still a rose never the less.

  16. Thank you for answering my question. I've recently noticed many of the department stores low on inventory such as filennes basement. Seems like they are purchasing less because their credit lines are down or because they just don't expect much to sell anymore. I'm sure this is sending ripples all over the world.