"Revised Q2 GDP Figures: Much Worse Than the Headline..."(Nouriel Roubini)

[swag]

Nouriel Roubini is an economist who most recently has gained ink and airtime by giving a 70% chance to a significant economic recession in the U.S. beginning in 2007. The RGE bio of him is at the end of this post, below the article excerpt. Many economists disagree with him and many agree with him, all to varying degrees. Still, what he has to say is interesting and, given his background, his words command attention.

Roubini's blog on RGE Monitor:

Revised Q2 GDP Figures: Much Worse Than the Headline…Beware of the Spin Doctors,
Nouriel Roubini, Aug 30, 2006

Beware of these spin doctors. Behind the headline figure, the numbers in the revised Q2 figures are much worse than the initial estimate. Essentially, almost all of the upward revision to the figures comes from a much larger increase in inventories of unsold goods, an ominous signal for future growth as firms saddled with unsold goods will soon start cutting production (as it is happening, for example in the auto sector). Indeed, if you exclude inventories and look at final sales, the figures are much worse: in Q2 final sales of domestic product grew only 2.3%.

The GDP growth improvement is also due in part to slightly better net exports but beware of this. The fact that now net exports are not anymore a drag on growth is also bad news, not good news: as the economy sharply slows down imports of consumption and investment goods are slowing down. Thus, the news from net exports is also lousy as it signals the coming recession: net exports improve when an economy slows down and worsen when the economy grows fast. Indeed, the figures about a fall in imports - a -0.1% in Q2 – are a clear indication that, as the economy is sharply slowing imports are falling.

The sharp increase in inventories is particularly worrisome since, as in any inventory cycle, an increase in such supply of unsold goods, is a leading indicators that firms will tend to reduce production when faced with slowing demand and rising inventories. So, higher GDP figures for Q2 via higher inventories means that – all equal – Q3 and Q4 figures for GDP growth will be worse than otherwise as a sharp inventory adjustment will occur; indeed, the Ford decision to cut production by over 20% in Q4 is a typical – if extreme - canary in the mine in terms of signaling how corporates will react to a sharp unexpected increase in inventories.

The new data also confirm that the bust in the housing market is even greater than initially estimated: real residential investment fell in Q2 at an annualized rate of -9.8%, much worse than the initial estimate of -6.3%. Given these revised figures I now expect that real residential investment will fall closer to a 20% annualized rate for the next few quarters. As I discussed in a number of recent writings (here and here and here) this housing bust will be a crucial driver – both directly and indirectly of the coming economy-wide recession that I am predicting.

. . . more:

http://www.rgemonitor.com/component/option,static/inc,bios/Itemid,105/bio">Roubini bio:

Nouriel is a Professor of Economics at the Stern School of Business at New York University (see http://pages.stern.nyu.edu/~nroubini/ for his Stern homepage). His applied academic research includes seminal work in international macroeconomics, global macro policies, financial crises in emerging markets and their resolution, and the reform of the international financial architecture. As a leading economist in the field of international macroeconomics, Nouriel has had significant senior level policy experience. Numerous policy appointments include former assignments as Senior Economist for International Economics at the White House Council of Economic Advisors, Senior Advisor to the Under Secretary for International Affairs at the U.S. Treasury, Director of the Office of Policy Development and Review at the U.S. Treasury. He has been a policy and research consultant at the IMF since 1985, and is a member of many leading policy forums and organizations including the Bretton Woods Committee, the International Roundtable of the Council of Foreign Relations, the NBER and the CEPR. Nouriel is a consultant for a wide range of policy institutions, Central Banks, and a number of senior executives from major financial institutions. His recent book with Brad Setser on financial crises in emerging markets, Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies, was published by the Institute for International Economics Council of Foreign Relations in 2004.

[alfredo]

1. bush will have to do some mighty spinning if this starts

showing up as layoffs right before the Nov elections.

[indepat]

2. Maybe his corporate donors will wait until after the election

[alfredo]

3. Even the corporatist are hedging their bets this cycle.

K Street is looking to the blue.

[swag]

4. A kick before dying.