GDP Numbers Reveal Momentum Underlying U.S. Economy
The Commerce Department said Thursday the nation’s gross domestic product—the government’s broadest measure of economic output—expanded at a 3.7% seasonally adjusted annual rate in the spring, faster than the initial estimate of a 2.3% growth rate. Other recent reports have shown gains in consumer confidence, retail sales and home building.
The latest GDP numbers show that consumer spending, which represents more than two-thirds of economic output, grew at a 3.1% rate in the second quarter, up from the initially reported 2.9% pace. That is a marked improvement from the first quarter’s 1.8% rate, and July’s encouraging retail sales figures suggest the consumer outlook is improving amid steady hiring and lower gasoline prices.
Spending on home building and improvements advanced at a 7.8% pace, compared with a previous reading of 6.6% and a first-quarter gain of 10.1%. Solid readings may carry into the third quarter, underpinning growth. July single-family housing starts and existing home sales both have touched postrecession highs. (…)
Inventories, which add to GDP when they are rising, are one factor likely to weigh on growth in the second half of the year. Companies have added heavily to stockpiles—rising at a $121.1 billion pace in the second quarter—an accumulation of goods that is unlikely to continue into the current quarter. (…)
By Another Measure, U.S. Economic Growth Has Nearly Stalled This Year
An alternative measure of economic output, gross domestic income, advanced at a much slower 0.6% pace last quarter. By that gauge, economic growth barely inched ahead in the first half of the year. (GDI advanced at 0.4% pace in the first quarter versus a 0.6% increase for GDP.)
GDI and GDP measure the same thing: the size of the economy. GDP measures production based on what is spent by consumers, businesses and governments, while GDI measures the income generated from production. So, things like wages, corporate profits and taxes.
In theory, the two measures of output should be identical. But since they come from different source data, they can differ widely from quarter to quarter. For example, in the first quarter of 2012, GDI advanced 7.7%, while GDP increased at a 2.7% pace. In the third quarter of 2007, GDI fell at a 2.2% pace but GDP advanced 2.7%. Both measures are adjusted for inflation. (…)
The president’s Council of Economic Advisers advocates for considering a blend of two measures. A report published last month noted an average of GDI and GDP “is a better predictor of future revisions to the data” than considering the initial read of GDP alone.
That could indicate Thursday’s GDP figure could be downgraded when government number crunchers incorporate more comprehensive data.
The Commerce Department acknowledged those views, to a degree, in Thursday’s report by publishing the average of GDI and GDP for the first time. It showed 2.1% growth last quarter.
Sound familiar? By either measure, the economy has been growing only a little better than 2% annually since the recession ended—though the average annual gain in GDI from 2010 through 2014 was slightly larger than the increase in GDP.
The weaker GDI increase the last two quarters has helped pull the overall output figures closer into alignment.
Fed Urged to Press Ahead With Rate Rise After months of forewarning by the Federal Reserve that it is preparing to raise short-term interest rates, some international officials have a message: Get on with it already.
(…) “If you delay something that you were planning to do, then you leave the impression that your compass is different than what you led markets to believe,” Jacob Frenkel, chairman of J.P. Morgan Chase International and former head of the Bank of Israel, said in an interview Thursday. Market drama is increased by delay, he added. (…)
“It’s better for the U.S. to make a decision,” Bambang Brodjonegoro, Indonesia’s finance minister, said Wednesday in an interview in Jakarta. “What makes the financial markets volatile is the uncertainty.”
Raising rates would signal that the Fed is confident about the U.S. economy, Bank of Japan Governor Haruhiko Kuroda said Wednesday in New York, before the Fed gathering. “That is not only good for the U.S. economy, but also for the world economy, including the Japanese economy,” he said. (…)
New Zealand central-bank Governor Graeme Wheeler, who has expressed a desire to see his country’s currency depreciate, said in a speech in July that “we are likely to see the Federal Reserve and the Bank of England begin the process of normalizing their interest rates, and this may assist the [New Zealand] currency lower.” (…)
(…) Thursday’s revision to second-quarter gross domestic product—the Commerce Department now says that it grew at a 3.7% annual rate, rather than 2.3%—shows the economy is on good footing. And with the rebound in the stock market, nerves are a little less frayed. A good August jobs report next week, reasonably calm markets and September would be very much in play.
Moreover, a September liftoff would give the Fed an opportunity to show markets a little tough love with little consequences. It is, after all, looking to raise its range on rates from the current zero to 0.25% this year. Doing so sooner rather than later would be a signal the Fed wasn’t going to let markets dictate what it should do, and that it wouldn’t predicate policy on waiting for the absolute perfect time to move.
At the same time, with inflation well below its 2% target rate, it is also clear any rate increase this year won’t likely be followed quickly by further ones. So a September move wouldn’t spook investors into thinking policy was about to get a whole lot tighter. (…)
(…) “I want to take the time I have between now and the September meeting to evaluate all the economic information that’s come in, including recent volatility in markets and the reasons behind that,” Ms. Mester said. “But it hasn’t so far changed my basic outlook that the U.S. economy is solid and it could support an increase in interest rates.” (…)
Ms. Mester said there is now more downside risk in her forecast for economic growth because of market volatility and uncertainties about the growth outlook in China. Moreover, falling oil prices and a rising U.S. dollar mean it will take longer for inflation to rise toward the Fed’s 2% inflation objective, she said. She had seen a return to 2% inflation by late 2016, but now says it will take longer to get there.
But she added that recent economic data—including reports on economic output, durable-goods orders, household spending and consumer confidence—suggested the economy has “pretty solid momentum.”
“There is probably more downside risk to my forecast now given the volatility, but my baseline forecast probably hasn’t moved enough to change my view on policy,” she said. (…)
U.S. Pending Home Sales Post Limited Gains
The National Association of Realtors (NAR) reported that pending sales of single-family homes rose 0.5% during July (7.2% y/y) following a little-revised 1.7% June decline. Expectations were for a 1.0% increase according to Bloomberg.
Last month’s sales gain was due mostly to a 4.0% rise in the Northeast (12.3% y/y). Sales in the South improved 0.6% (5.3% y/y) but in the Midwest sales were unchanged (5.4% y/y). In the West, sales declined 1.3% (+9.2% y/y).
Last 3 months: Northeast: +9.1%; Midwest: –3.8%; South: –3.6%; West: +0.8%. Total: –0.6%.
Go figure!
Lending to Eurozone Firms, Households Advances
The data published Thursday showed that loans to firms grew by 0.9% in July in annual terms, higher than the 0.2% seen in June. Lending to households rose by 1.9% on the year versus 1.7% in June.
China Will Respond Too Late to Avoid Recession, Citigroup Says
China is sliding into recession and the leadership will not act quickly enough to avoid a major slowdown by implementing large-scale fiscal policies to stimulate demand, Citigroup Inc.’s top economist Willem Buiter said.
The only thing to stop a Chinese recession, which the former external member of theBank of England defines as 4 percent growth on “the mendacious official data” for a year, is a consumption-oriented fiscal stimulus program funded by the central government and monetized by the People’s Bank of China, Buiter said.
“Despite the economy crying out for it, the Chinese leadership is not ready for this,” Buiter, chief economist at Citigroup, said in a media call hosted Thursday by the Council on Foreign Relations in New York. “It’s an economy that’s sliding into recession.” (…)
“They will respond but they will respond too late to avoid a recession, which is likely to drag the global economy with it down to a global growth rate below 2 percent — which is in my definition a global recession,” said Buiter.
The global economy will expand by 3 percent this year, while China’s is forecast to grow 6.9 percent, the slowest pace in a quarter century, according to economists surveyed by Bloomberg. (…)
China’s Banks Face Worst Year in More Than a Decade China’s biggest lenders are scrambling to clear rising bad loans from their books, as a faltering economy weighs on loan repayments and sets banks on pace for their worst year since they began listing shares 13 years ago.
(…) Industrial & Commercial Bank of China Ltd., the nation’s largest lender by assets, said Thursday that its net profit in the first half rose 0.6% to 149.02 billion yuan ($23.27 billion), far below the 7% growth in the same period last year and half the rate of 1.4% in the first quarter.
Agricultural Bank of China Ltd., the country’s third-biggest bank, posted net profit growth of 0.3% to 104.32 billion yuan, compared with 13% a year ago and 1.3% in the first quarter. Profit at Bank of Communications Co. rose 1.5% to 37.32 billion yuan, compared with a 6% gain a year ago.
Bank of China Ltd. said Friday its first-half net profit rose 1.1% to 90.75 billion yuan, slowing from 11% growth a year earlier. (…)
Chinese banks maintain a squeaky-clean level of toxic debt on their books. ICBC said its bad-loan ratio, which measures nonperforming loans as a percentage of total loans, reached 1.4%, compared with 1.29% at the end of March. Bank of Communications posted 1.35%, a rise from 1.3% three months earlier. Agricultural Bank reported 1.83%, up from 1.65% in the first quarter.
These levels are low by global standards, but few analysts believe the rate accurately reflects asset quality among lenders. Valuations of Chinese banks provide a better clue to worsening bad-loan levels, analysts said.
“The banks’ share prices acknowledge there is way more uncollectable debt on their books than they now acknowledge,” said Anne Stevenson-Yang, director of J Capital Research in Beijing.
ICBC’s Hong Kong-listed stock is trading at 0.8 times its book value, a measure of net worth, from 2.9 times book value in 2009. Bank of China Ltd.’s price-to-book ratio has fallen to 0.68 from around 1.8 in 2009. Investors use the indicator to gauge potential problems in the company.
The first-half reports show banks have been scrambling to throw out bad debt. ICBC wrote off 31.3 billion yuan of bad loans, more than double 12.7 billion yuan of a year earlier. AgBank’s write-offs reached 15.4 billion yuan in the period, from 11.8 billion a year ago.
Though banks’ data suggest nonperforming loans are inching up only slowly, another measure suggests troubled loans are mounting. Special-mention loans, a category that banks deem overdue but not yet impaired, are rising. Analysts say these loans are often just soured loans that lenders haven’t acknowledged yet.
At the end of June, ICBC reported 420.4 billion yuan of special-mention loans, nearly three times more than its nonperforming loans and accounting for 3.6% of total loans. A year ago, the bank reported just 231 billion yuan of special mentions, or 2.1% of loans.
“The market believes that there is a lot more bad loans under the hood,” said Oliver Barron, head of research at investment bank North Square Blue Oak.
As worries loom, lenders have been increasing provisions, but these buffers can’t keep pace with the proliferation of bad loans. ICBC set aside provisions that were 1.63 times as large as their bad-debt levels in the first six months, down from 2.4 times in the same period last year—a sign that it is struggling to insulate itself, analysts say. Provisions at Agricultural Bank reached 2.39 times the level of bad debt in the January-June period, slipping from 3.46 times a year earlier.
How Brazil’s China-Driven Commodities Boom Went Bust Brazil’s big bet on China is turning sour as the Asian country’s once voracious appetite for Brazilian exports dims.
(…) Brazil’s pain from China’s slowdown isn’t largely confined to the financial markets, as in some countries, but goes to the heart of its real economy. (…)
As inflation nears double-digits and as unemployment and interest rates rise, middle-class households are starting to miss car payments and the poor are eating less meat. (…)
Rich in iron ore, soybeans and beef, not to mention oil, Brazil was positioned as a supplier of many things China needed. Its annual trade with China, only around $2 billion in 2000, soared to $83 billion in 2013. China supplanted the U.S. as Brazil’s largest trading partner. (…)
“Unfortunately, the history is that commodity-dependent economies do not catch up with the U.S.,” said Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management. “Not just oil producers. More countries end up being poorer, compared with the U.S., after they find a commodity than catch up.” Using data going back to 1800, he said commodity-dependent economies typically grow for a decade, then spend as long as two decades wallowing or slipping back.
Some reasons are structural. The influx of hard currency from commodity exports strengthens a country’s own currency, which can toughen conditions for non-commodity industries such as manufacturing by hampering exports and making imports cheaper. At the height of Brazil’s boom, Goldman Sachs declared Brazil’s currency, the real, the world’s most overvalued. Movies and taxis in downtown São Paulo were more expensive in dollar terms than in New York. Brazil’s manufacturers began contracting. (…)
Brazil’s exports to China tumbled by 19% in the first seven months of this year. (…)
SENTIMENT WATCH
Fed Up Investors Yank Cash From Almost Everything Just Like 2008
Since July, American households — which account for almost all mutual fund investors — have pulled money both from mutual funds that invest in stocks and those that invest in bonds. It’s the first time since 2008 that both asset classes have recorded back-to-back monthly withdrawals, according to a report by Credit Suisse.
Credit Suisse estimates $6.5 billion left equity funds in July as $8.4 billion was pulled from bond funds, citing weekly data from the Investment Company Institute as of Aug. 19. Those outflows were followed up in the first three weeks of August, when investors withdrew $1.6 billion from stocks and $8.1 billion from bonds, said economist Dana Saporta. (…)
Withdrawals from equity funds are usually accompanied by an influx of money to bonds, and an exit from both at the same time suggests investors aren’t willing to take on risk in any form. (…)
Stock Market Investors Should Watch the Credit Canary
(…) Yields on U.S. junk bonds recently hit their highest since 2012 before edging lower to stand at 7.33%, according to Barclays indexes. They have risen by 1.4 percentage point since the start of June, and by 2.5 percentage points from their 2014 low. (…)
Yields have been driven higher mainly by borrowers exposed to energy and commodity prices. Energy bonds are down 8.4% year-to-date; bonds issued by metals and mining companies are down 12.5%. Energy and basic industries are hefty sectors, accounting for 25% of the U.S. high-yield index. The energy sector’s woes will almost certainly cause defaults to rise. That, however, will be from low levels: the global default rate in July was 2.4%, according to Moody’s Investors Service Inc., well below the 25-year average of 4.6%. (…)
In the investment-grade market, the gap between the yield on corporate bonds and U.S. Treasurys has widened, a potential cause for added concern. But the move has been relatively modest. Spreads have widened by 0.25 percentage point to 1.7 percentage point since the start of June, according to Bank of America Merrill Lynch indexes. Bond supply has been extremely heavy; in July alone, issuance hit $145 billion versus an average over the previous three years of $78 billion, according to Société Générale. (…)
Chinese Stocks To Plunge Another 35%, BofA Says
The rebound in China’s stocks will be short-lived because state intervention is too costly to continue and valuations aren’t justified given the slowing economy, says Bank of America Corp.
“As soon as people sense the government is withdrawing from direct intervention, there will be lots of investors starting to dump stocks again,” said David Cui, China equity strategist at Bank of America in Singapore. The Shanghai Composite Index needs to fall another 35 percent before shares become attractive, he said.
Hmmm…Look at these GD charts (full report available here)
Selling a Home for $100K Over Ask
Dalio: