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:
- 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.
- 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.
- Default is not seen as a risk, but more countries (particularly in Europe) will be forced to ask for bailouts in 2011.
- 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]
- 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.
