Q2 GDP Much Lower Because of June Trade Deficit

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The U.S. trade deficit widened to $49.9 billion in June instead of improving as expected. This figure was missing from the second quarter GDP report and could mean a downward revision to 1.3% from the originally reported 2.4%. The lower GDP number means almost all of the growth in Q2 came from inventory accumulation and not from increased economic activity.

The U.S. trade deficit has to be funded from foreign borrowing, just like the budget deficit. Before the Credit Crisis, both used to be around the same size. Then the budget deficit exploded from record levels around $400 billion to over $1.4 trillion in 2009. The trade deficit went in the other direction, decreasing substantially, but is now coming back. The deficit in June was 19% higher than in May and would be almost $600 billion annualized. Exports fell, with computers and telecommunications equipment declining. Imports rose with consumer goods hitting a record high. Ironically, this is being made possible by the huge budget deficit the federal government is running. U.S. consumers are using the money they get from stimulus spending to buy foreign goods - something that will only lower U.S. economic growth.

The trade deficit reducing the GDP number for the second quarter has far wider implications than growth just being anemic. It confirms that the economic 'recovery' that supposedly started in the summer of 2009 has been based almost entirely on changes in inventories. From the Q3 of 2009 to Q1 of 2010, around two-thirds of the growth reported came from the inventory category. This fell to 44% in the first reading of this year's Q2 GDP, still a high number, but better than the 71% from Q1. If Q2 is revised down to 1.3%, the 1.05% that inventory contributed to GDP would represent 81% of total growth. Excessive inventory accumulation means lower GDP growth or even drops in future quarters.

Stocks turned ugly yesterday, whether because of the implications that growth was much weaker in Q2 than the originally reported number or because the realities of the Fed's August meeting finally sank in, is not clear. The Dow Industrials were down 265 points or 2.5%, the S&P 500 lost 32 points or 2.9%, Nasdaq dropped 69 point or 3.1% and the small cap Russell 2000 fell 26 points or 4.1%. Market weakness continued this morning and stocks are starting to suffer serious technical damage, which could lead to much bigger drops in the coming weeks ahead.

A just released NBC/Wall Street Journal survey indicates that close to two-thirds of the American public think that the economy is going to get worse before it gets better. Mainstream economists now think GDP growth will be 2.5% in the second half of the year. The Fed still thinks it will be above 3%. For months, both have denied the possibility of a double-dip recession. Increasingly negative economic reports however indicate another recession may have already arrived.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

New Home Sales: Still at Depression Levels

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The June New Homes Sales figures were released today and the Commerce Department claimed they were up almost 24%. Stocks rallied strongly on the supposedly good news. A revision of May's all-time low number to a much worse all-time low number is what gave the appearance of a strong rebound.

New home sales for May were originally reported at a 300,000 annual rate last month. This compares to a high of around 1.4 million in 2005. It was also the lowest number ever recorded in the history of the data. As bad as 300,000 was, and it was truly awful, there was a significant downward revision for May sales in the current report to only 267,000.

May sales were also not the only month with a downward revision. The figures for April were originally reported as 504,000 in the report released in May. Then in the report released in June, they were revised lower to 446,000. Then in today's July report they were revised downward again to 422,000. Do we see a trend here?

The home buyer tax credit was good until the end of April. With the revised numbers, new home sales actually fell 37% in May, not the merely disastrous 33% originally reported. The drop from the originally reported April number was 47% however. If you wish to claim there was a 24% rebound for the numbers in June, as the government did, you need to put it in the context of a 47% drop first taking place, otherwise you are comparing apples to oranges. No matter how you look at it though, new home sales were and still are at depression levels.

New home sales figures have been continually revised downward for several months now. It is highly likely that the 330,000 number just reported for June will be revised lower next month and quite possibly lower again the month after that. The Commerce Department reports the best number possible the month of the release. The mainstream media then gives that news big attention and uses it to reinforce an image that government programs are being effective. When the downward revisions take place in future months and indicate things aren't quite so rosy, that news gets buried in the article - if it is mentioned at all. This is not the only U.S. government data where this pattern exists, nor does this only take place in this country. Investors shouldn't let themselves be tricked by this game.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

June Employment Report: Where are the Graduating Students?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Every May and June millions of students graduate from high school and college and enter the U.S. labor force swelling the numbers. Yet in the just released employment report for June, the BLS claimed the labor force decreased by 652,000 last month. This followed a decrease of 286,000 in May. This of course is not possible unless the U.S. economy is in the midst of a depression.

So where did the all the recent graduates go? One place most of them didn't go was to a place of employment. A survey by the National Association of Colleges and Employers found only 40% of new college graduates had a job offer before leaving school in 2010. This compares to two-thirds in pre-recession 2007.  High school graduates not going to college probably didn't do much better. The BLS lists the unemployment rate for those between 16 and 19 as 25.7%.

According to the Statistical Abstract of the United States, 3.3 million students graduated high school and another 3.3 million received college degrees in 2010. While not all of these people would have entered the labor force, it can be assumed that at least a few million did in the last two months. Nevertheless, the BLS claims that there were almost a million less people in the U.S. labor force in June than there were in April. This huge drop in participants caused the reported unemployment rate to drop to 9.5% in June since people who leave the labor force aren't counted as unemployed. The Bureau explained these disappearing participants as people who gave up looking for jobs because none were available for them - not exactly an indication of a recovering job market.

BLS figures further show that there were 301,000 less employed Americans in June than there were in May (see http://www.bls.gov/news.release/empsit.a.htm). The headline number reported a loss of only 125,000 jobs however. The BLS explained this away as a loss of 225,000 census jobs and claimed that the private sector added 83,000 jobs. If you use the 301,000 figure though, it looks like there was a loss of approximately 83,000 private sector jobs.

The insane contradictions in the BLS figures can partially be explained by 'seasonal adjustments'. This is one of the statistical tricks the bureau utilizes to try to make a sow's ear look like a silk purse. Seasonal adjustments make it possible for millions of graduating students to enter the labor force and the BLS to report that the labor force shrank while this was happening.

The employment numbers should be seen for what they are - absurd results created by gross manipulation. Many people however don't wish to believe this takes place despite all the evidence. Those are the people who really need to worry about the current state of the U.S. economy. If the labor force can decline by a million when millions or graduating students are entering it, this means it really lost maybe four or five million workers in a two-month period. That indicates that things are worse in the U.S. now than they were during the Great Depression in the 1930s.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.