Q4 2010 GDP, Final Revision

GDP, or Gross Domestic Product, is the sum of all private domestic consumption plus gross private domestic investment plus government spending plus the current trade balance. This is a huge economic data point, because it represents the economic health of a nation. It gets reported three times in a quarter - the first month is the advance figures, the second month is the preliminary revision, and the third month is the final revision. This month, we're getting the final revision.

Now, things weren't looking all that good when the preliminary revision was released. Real GDP was revised downward to 2.8%, the GDP price index[1] came in at 2.1%, and the "core" GDP price index came in at 1.2%.

Looking towards the Q4 final revision, the Econoday-surveyed analysts are expecting real GDP to be revised upwards to 3.1%. Of course, they're also expecting to see the GDP price index remain unchanged at 0.4%[2], so take their predictions with a grain of salt.

Now, turning to the Bureau of Economic Analysis, we examine the Fourth Quarter 2010 final estimate for GDP. GDP increased at an annual rate of 3.1% in Q4 (right in line with expectations). The BEA credits a downturn in imports, an increase in personal consumption expenditures, an upturn in residential fixed investments, and an acceleration in exports for the GDP growth. The price index increased 2.1%, with the "core" price index increasing 1.1%.

[1] One measure of inflation.

[2] No, I have no idea where they're getting that from either. The Bureau of Economic Analysis report was pretty clear in showing that the Q4 preliminary revision GDP price index was 2.1%.

The US Will Destroy The Global Economy. Also, GDP.

Gross Domestic Product - specifically, the initial GDP estimate for Q4 2010 - is the big news for the morning. And since GDP is a measure of the entire economic output of the country - consumer spending, private sector spending and production, and government spending - this is a huge one. Q3 hit a final result of 2.6% growth, and the GDP Price Index (a measure of inflation) came in at a final 2.1%. For Q4, the analysts are optimistic. They're looking for a 3.5% increase, with the price index increasing only 1.5%.

Less spectacular, but also due out at the same time, is the Employment Cost Index. Employees are a substantial expense for businesses, and this index measures the increase or decrease in total employee compensation (wages, salaries, and benefits). There is no particular expectation for the index, but investors will be watching this not just because it will show increases (or decreases) in employer costs, but also because it can indicate whether or not we are experiencing wage inflation. If wages are rising substantially faster than inflation, it increases the odds that interest rates will rise as the Fed tries to suck money out of the economy.

Based on comments from the Fed (and from other sources), my prediction is that the ECI will be up by a small amount.

And while we wait, let's turn to the Chinese rating agency, Dagong Global Credit Rating[1], for an outsider's perspective on the current world economic situation. In their first annual global sovereign credit risk outlook, they are predicting that the developed nations will be the next "major source of global sovereign credit risk in 2011", in the following stages:

1. The financial needs of developed debtor nations will rise, and their debt will continue to expand. Most will have financing requirements as large as 20% of GDP, and debt servicing will account for about two-thirds of their total financing requirements.
2. Weak economic growth and an inability to eliminate structural deficits will both further increase the debt of developed nations and will make it impossible to maintain the solvency of the developed debtor nations. Interest rates will rise and lenders demand increased reward for the risks they assume.
3. Default is not seen as a risk, but more countries (particularly in Europe) will be forced to ask for bailouts in 2011.
4. I'll just quote this one: "Fourth, the United States, as the biggest country involved in sovereign debt crisis around the world, will continue its quantitative easing policy when the country is in danger, and the world credit war will be escalated due to the overflow of US dollars. In particular, the trend of continuous depreciation of US dollar will result in haircut of international creditors' debts dominated in US dollar. The issuance of US dollar encourages numerous speculative capitals into the global commodity market, leading to an increasing pressure on global inflation. Different countries, in order to avoid unpredictable losses on their own interests, will have to seek for adjustment of international credit relations, and the global credit war, no doubt, will become the turning point of reforming international credit relations in 2011."[2]
5. The extremely loose monetary policy of the developed debtor nations cannot and will not be substantially changed in 2011. The excess global liquidity that results is a potential disaster for developing nations; expect to see housing prices fall, emerging market economies slow down, and exchange rates depreciate. In some extreme cases, look for political crises.

And with the end of western civilization predicted, let us turn now to the Bureau of Economic Analysis for the Q4 2010 initial GDP estimate. Failing to meet expectations by a small amount, GDP is estimated to have increased 3.2% in Q4 2010. Mostly on personal consumption expenditures, exports, and nonresidential fixed investment. Also imports, which have a negative impact on GDP, decreased. The price index missed expectations more significantly, increasing 2.1% in Q4. These are far from final numbers, though. Next month we'll get an initial revision, and then March will provide a final revision.

Turning to the Bureau of Labor Statistics, we also have the Employment Cost Index news. Compensation costs for civilian workers increased 0.4% in the month of December. for the year, they're up 2.0%, a greater increase than the 1.4% in 2009. Most of that came from a 2.9% increase in benefit costs, while compensation costs increased 1.5% (mostly driven by retirement costs). Compensation costs for private industry workers increased 2.1% for the year, while compensation costs for State and local government workers only increased 1.8%.

{1] Which has rated China's sovereign debt at AA+, and US sovereign debt at A-.

[2] In other words, they expect the US to continue to crank out dollars by the billions, devaluing the currency. Existing Treasury bond holders will suffer as a result, because their loans will be repaid in debased currency. This will drive inflation on a global scale, because the US dollar is the reserve currency of the world.

A Day Full Of GDP Is Like A Day Full Of Sunshine

And today? Today has plenty of sunshine.

Great Britain reported it's final Q3 2010 GDP results about 4 hours ago. The first revision had put them at 0.8% growth for the quarter (with 2.8% growth from Q3 2009 to Q3 2010). Going into the day, analysts were expecting no change to the final revision. The final results, while not bad, did not quite live up to that expectation. Growth for the quarter was revised down to 0.7%, while year over year growth was revised downward to 2.7%. Mildly disappointing, but not (on its own, anyway) a source of soul-crushing despair.

US GDP is up next. The first revision put us at 2.5% growth for Q3 2010, with the price index[1] up 2.3%. The Street is feeling quite optimistic this morning, and is looking for the final revision to put us at 3.0% growth for Q3 with no change to the price index. Our results are slightly sunnier than Great Britain's, with the final revision of Q3 GDP revised upwards 2.6% and the price index revised downwards to 2.1%. Most of the GDP increase is credited to a "sharp deceleration in imports and an acceleration in private inventory investment".

The funny thing here? These results seem to have pushed the futures down. Go figure.

The next big domestic economic measure due out today is existing home sales for November 2010. If you recall, October's sales were a depressing 4.43 million units (down 2.2% from September's 4.53 million units and missing expectations). Expectations are a little tamer (but still optimistic), with a consensus estimate for 4.75 million sales. The actual numbers aren't due out until 10 AM EST, though, so we have no idea (yet) how realistic that is.

In the news, South Korea is continuing their largest peacetime military exercise ever. Mostly as a way of making President Lee Myung-bak look tough after what was commonly perceived as a "weak"[2] response to the shelling of Yeonpyeong Island. There has been no specific response to this from North Korea, to the shock of everyone and the disappointment of connoisseurs of fine crazy.

There was a three hour strike in Greece against the 2011 austerity measures about to be implemented by their parliament. So far, the strikers have managed not to murder anyone.

Speaking of the PIIGS, China[3] is coming to their rescue. They have struck a deal with Portugal to buy 4-5 billion euros of Portuguese sovereign debt. At least, that's what has been reported in the Jornal de Negocios. The euro is up in ecstatic jubilation on the news.

Closer to home, the Financial Report of the United States is out (you can choose to read either the 12 page Citizen's Guide or the 268 page full report), and it shows that the budget deficit has increased by 65.9% from FY 2009 to FY 2010 (in 2009 it was "only" a $1,253.7 billion deficit for the year, while in 2010 the deficit has increased to $2,080.3 billion).

And, wrapping up the GDP day, New Zealand's GDP is due out at 4:45 PM EST.

[1] Yet another measure of inflation.

[2] "Weak", because the word "sissy" rarely makes its way into Reuters. Although that's pretty much how the South Korean people looked at his response.

[3] Still not wanting to replace the United States as the sole superpower of the world - just ask them - and still tired of being treated like they're solely responsible for holding North Korea's leash.

The Trade Deficit Is Looking... Well... Not Terrible

The International Trade balance is out now. This is our nation's net exports. If the number is positive, we are exporting more than we are importing. If it is negative, we're importing more. This is one of those huge market movers, because net exports are a component of GDP calculations. Positive numbers mean a (potentially) improving GDP, while negative numbers mean a (potentially) worsening GDP.

And the estimates for this month indicate a potentially worsening GDP. For September, we came in at a net -$44.0 billion. Looking to October, the analysts are anticipating a second month at -$44.0 billion. As long as we don't come in worse than this, traders will feel minimal need for sorrow.

And where does that international trade balance stand? Well, counting both goods and services, we exported $168.7 billion and imported $197.4 billion in October. That works out to a net of -$38.7 billion, which is a substantial 12% improvement from September. Total exported goods came in at $112.3 billion and goods imports came in at $163.7 billion (a net of -$51.4 billion, which does represent a $5.7 billion improvement from September). Total exported services came in at $46.4 billion while services imports came in at $33.7 billion (a net of $12.7 billion, a $0.2 billion improvement from September).

All in all, not too bad. It would have been nice to see even more improvement in manufacturing exports - since that would be a really nice sign for the US manufacturing and production sectors - but I guess we shouldn't look a month-over-month 10% improvement in the mouth.

What In The World Is Happening this Morning?

Well, right off the bat the futures are down. The credit for this goes first and foremost to the Dear Leader Kim Jong-il and his ever-so-subtle market manipulating strategies. To whit, North Korea has shelled Yeongyeong, a South Korean island about 75 miles west of Seoul. So far two soldiers have been confirmed dead and 17 more wounded, and three civilians have been injured. And by shelling, I mean "...at least 200 North Korean shells hit Yeonpyeong". North Korea has claimed that South Korea started the fight by shelling them first; South Korea did confirm it was "...conducting military drills in the area beforehand but had fired west, not north." There's nothing quite like the prospects of a war that never actually ended flaring back up to ruin everyone's day.

Racing the sun westward we come to Ireland, where Prime Minister Brian Cowen has been forced to come to terms with the fact that his nations is two steps from wandering into Europe with a dirty rag, smearing it on Germany's windshield, and then asking for spare change for "cleaning" it. Part of his coalition government is in negotiations with the European Union and the International Monetary Fund to borrow something like 60% of Ireland's GDP as a bailout. The rest of his government is demanding that he sacrifice his own life that his blood may renew the fertility of the land, or at least that he resign immediately or face a vote of no confidence.

"North Korea shells South in fiercest attack in decades" (http://www.reuters.com/article/idUSTRE6AM0YS20101123)
"Korea tensions weigh on stock futures" (http://www.reuters.com/article/idUSTRE69O1D320101123)

But enough of these foreigners! How are things looking close to home?

Gross Domestic Product is the theme of the hour - or it would be, had the "Dear Leader" not decided to present his son and heir-apparent - the Brilliant Comrade Kim Jong-un - with a bouncing baby resumption of hostilities for no reason anyone can work out (that doesn't involve the sort of megalomaniacal insanity possessed by the dictator of North Korea). Gross Domestic Product is, of course, private consumption plus gross investments plus government spending plus exports minus imports, which is a fancy way of saying it is value of all goods and services produced within a country in a year. The Street savors the sweet, sweet scent of GDP like nothing else because it is the single clearest picture available to tell us how the economy is doing. Is GDP increasing? Let us rejoice! Is GDP failing? Let us offer a fatted calf on the alter of John Maynard Keynes, and look to stimulus to save us!

Last month the initial estimates for Q3 2010 GDP, and the Q3 2010 GDP price index (AKA yet another way to estimate inflation) were released. These figures go through an interesting process of initial estimates the first month, then preliminary revision results the second month, and then final revision results the final month. So whatever we announce today still won't be the final for-real GDP for Q3. But still, the Street loves it some GDP figures, so here we go:

The initial Q3 estimate for GDP was 2.0%, with the GDP price index at 2.3%. In the pre-release hype, analysts were looking for the GDP to be revised upwards to 2.4%, with the price index remaining unchanged at 2.3%. The announcement was due out 20 minutes ago, so how did we do?

The actual release from the Bureau of Economic Analysis may be read at http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm. GDP was revised upwards to 2.5% for Q3, with the price index remaining unchanged at 2.3%. Of that:
* real personal consumption expenditures increased 2.8% in Q3 (an accelerating increase from Q2's 2.2% increase)
* real exports of goods and services increased 6.3% in Q3 (slowing from Q2's 9.1% increase)
* real imports of goods and services increased 16.8% in Q3 (slowing from Q2's 33.5% increase)
* real federal government expenditures and gross investments increased 8.9% in Q3 (slowing from Q2's 9.1% increase)

Good news? Yes. Good enough to overcome the North Korean Crazy Train? Probably not.

At 10, we're looking at Existing Home Sales. We had 4,530,000 units sold in September. The Street is expecting that to pull back a little; they really only expect to see 4,500,000 units sold in October.

How Stores Get You To Spend More

Black Friday, also known as this Friday, more or less kicks off the holiday shopping season. And while I'm in favor of corporations making a profit, and of good GDP numbers, here's some tips from CNNMoney.com to help you remember that those Black Friday sales aren't always the deals they sound like. Particularly if you get yourself roped into buying more than you intended to.

Have fun boosting the economy and all, but caveat emptor.

How stores get you to spend more <http://money.cnn.com/2010/11/22/pf/saving/holiday_savings/index.htm>
By Jennie Bragg, producer
November 22, 2010

NEW YORK (CNNMoney.com) -- The average person will spend 15 hours shopping for gifts this holiday season, according to Consumer Reports.

And whether we like it, or even realize it, stores are filled with tricks and triggers to make consumers spend more.

Before you hit the mall, keep a few things in mind to be sure you don't get duped.

Early bird specials

Retailers across the country have been advertising early bird promotions for those shoppers who are ready to spend some cash even before Black Friday.

While shopping early might help you to score a good deal, in many cases there are limited quantities of advertised sale items.

"The thing that gets people about these specials is the idea that there is a limited quantity of something," suggests Britt Beemer, chairman of America's Research Group. "When shoppers see exact quantities of an item advertised or in the store, they are afraid it will run out and they buy right away."

Retailers usually get multiple shipments of popular items throughout the holiday season, so if you don't get what you need in round one, try again later or look for the item online.

And keep in mind, the prices on Black Friday and around Thanksgiving may be advertised as sales, but retailers have been know to jack up prices during this time and then lower them, leaving the price you pay higher than before.

Promotional mailings

You have probably already received a slew of holiday mailings from various department stores and other retailers, but promotional gift cards are the things that really bring in the shoppers and make them spend.

"We are seeing more and more gift cards sent to consumers without any strings attached," says Britt Beemer. "This could be a ten or twenty dollar gift card mailed to you for use on any purchase."

These types of cards are great for retailers.

Shoppers are lured into a store with the promise of a small discount and often end up spending much more than they ever anticipated.

Many shoppers are also enticed by the idea of buy one get one (BOGO).

Take a step back. Do you need two of this item? If not, walk away.

And remember, nothing in life is free. BOGO is the same as getting something on the sale rack. A promotion like this, while it is still a good deal, is likely giving you 50% off.

Scents and sounds

The ambiance a retailer sets through music and aroma affects your mood and in turn the purchases you make in that store.

"While scents don't always work to keep customers in general retail stores," says Beemer. "This is a technique that works really well in places like William Sonoma when they are cooking something."

And beware of the festive tunes in the background.

"If I were going to have a store, I would be more concerned about the music the customers are listening to than the scent in the room," suggests Beemer. "The Christmas music on in a store can keep people in a store 30% to 40% longer."

If you find yourself humming your way to the cash register, you might want to rethink your purchases.

Sales people and door greeters

Have you ever wondered why it seems like there are so many more sale people in every store around holiday time?

The more people around to tell you your purchase is an excellent decision, the better.

"The store with great customer service and people skills will be the store that makes the most sales," says Beemer. "It is very simple. Sales people who make customers feel like they are making a good decision will make more sales.

FBI Beavers and Irish Bailouts and Giving Thanks

Those of you who read it may have noticed this headline in the Wall Street Journal: "U.S. in Vast Insider Trading Probe" (http://online.wsj.com/article/SB10001424052748704170404575624831742191288.html?mod=WSJ_hp_MIDDLETopStories). It's big, it's looking at multiple insider-trading rings, and the fallout could conceivably change the way the financial industry is allowed to do business. Some of the things the probes are looking at are:
* Was nonpublic information passed along by "expert network" companies to hedge and mutual funds?
* Did Goldman Sachs Group Inc bankers leak information about transactions that benefited certain investors?
* Have independent analysts and research boutiques been knowingly allowing clients to trade on inside information?
* Did traders at "a number of hedge funds and trading firms" improperly obtain and use nonpublic information about pending merger deals.

Ignites (http://www.ignites.com/c/124284/11924/insider_trading_probe_involves_funds_report, which may require a subscription to access) points out that currently "no mutual fund firms are identified by name as suspects, but Janus, Wellington and MFS are known to be among the clients of one analyst whom the FBI has accused of relaying inside information".

As of right now, no charges have been made, although a Federal grand jury is hearing evidence right now. Look for some indictments to be handed down in the next few weeks.

In world news, Bloomberg reports (http://www.bloomberg.com/news/2010-11-22/ireland-seeks-european-union-rescue-as-outsized-crisis-overwhelms-nation.html) that Ireland has recanted its claims from a week ago that it does not need financial aid. On Sunday, Irish Prime Minister Brian Cowen formally ate crow and requested financial assistance from the EU and the IMF. There are no official numbers - the details are still being worked out - but Goldman Sachs Group estimates that they may be tapping 95 billion euros. To put that in the market-crushing perspective it requires, Greece borrowed about 47% of its GDP. Ireland will most likely be borrowing close to 60%. If you've noticed that the futures are down this morning (and they are), this is why.

With all that in mind, we don't really have any market moving reports due out on this, the first day of the Thanksgiving trading week. Tomorrow we get the release of the Q3 2010 preliminary revision for GDP (analysts are expecting to see real GDP revised upward to 2.4% from the initial 2.0% estimate, with no change in the price index) and existing home sales (the Street is looking for a drop of 30,000 from September's 4,530,000 units). Wednesday brings durable goods orders, personal income and outlays, first time jobless claims, consumer sentiment, and new home sales. All by 10 AM. Then the markets are closed on Thursday (for Thanksgiving generally and, it appears, specifically for giving thanks for not having been indicted yet), and they close early on Friday.

CPI and Housing Starts

What is on the agenda for the day? CPI and Housing Starts, that's what's on the agenda.

The CPI, also known as the Consumer Price Index, represents... well, not to put too fine a point on it, it represents inflation. The CPI looks at how much buying power your salary has lost the previous month. Ahem. I mean, it looks at how much the cost of a fixed basket of goods and services that consumers would purchase has increased. While the "core" CPI looks at exactly the same thing, except that it cuts out volatile components of the basket like food and energy. Because, after all, how important are food, electricity, and gas to consumers? Really?

Anyway, CPI increased by a meager 0.1% in September while core CPI did not change in the slightest. The analysts aren't so optimistic for October; they're calling for a 0.4% increase, with a 0.1% increase in the core.

Why should you care? Well, it all gets back to that "two-thirds of GDP is driven by consumer spending" concept. If prices go up, consumers are able to buy less, and overall consumption goes down. This has a negative effect on GDP, particularly from a Keynesian economic perspective: spending good; savings bad [1].

Housing Starts are, well, exactly what they sound like. They're the number of residential construction projects that have broken ground during the month. September saw 610,000 starts. The analysts are expecting only 590,000 starts for October; that makes a certain amount of sense to me, given that it's October we're talking about here. That doesn't strike me as prime building season in the temperate climate most of the United States calls home.

But why should you - indeed, anyone - care? Three words: trickle down economics, baby. It's called voodoo economics when a President proposes it through tax cuts, but it's solid economics when it comes to home construction. Building a new house needs lumber, and copper pipe, and drywall, and paint, and shingles, and insulated copper wire, and a thousand other things. Then there's carpet, hardwood flooring, tiles, and appliances. Then, when the house is sold there's new furniture, lawn care products, insurance, and all the various and sundry things that transform a house into a money pit... I mean into a rapidly devaluing investment. Damnit, I mean into a home.

[1] Grossly simplified, actually, but correct in broad strokes.

October Retail Sales Expectations

Today, we're looking at Retail Sales. This is one of those mother-huge market movers. Private consumption (aka consumer spending) represents about two-thirds of GDP, and retail sales are about as solid a measure of consumer spending as you can get, so you can pretty much consider this a dry run for the GDP figures (due out 11/23).Now last month (and Retail Sales is a lagging data point), we saw expectation-beating results for September. Retail sales were up 0.6% (beating expectations by 10 bps), while retail sales ex-automobile came in at a healthy (but not expectation-beating) 0.4% increase. This has led to some optimistic projections for October. Overall retail sales are expected to be up 0.7% for the month, while the retail sales less autos are projected to hold fast at another 0.4% increase for the month.

Remember: these are month over month changes. If September was up 0.4%, and October was up 0.4%, that means an effective 8.16% increase from August.

The actual results aren't due out until 8:30 AM (Eastern time) tomorrow. The Econoday Economic Calendar, which is my go-to for what economic indicators to keep an eye out for and when to look for them, will have a summary of the results within minutes. If you prefer to go to the source, you can also check the U.S. Census Bureau's Monthly & Annual Retail Trade page. I'll also have some comments on them once they're out.

If the numbers meet or beat expectations, look for the market to be up in a delirious frenzy of consumption. If not, expect doom and despair.

Unless I'm wrong. It's been known to happen, once or twice.