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Notes to myself, possibly of interest to others.
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Friday, October 28, 2011

Rosenberg on "Q3 GDP Improves" Yesterday

[The] consumer spending pickup was largely financed by a decline in the personal savings rate from 5.1% to 4.1%...Health care and utilities drove consumer spending last quarter...

We can understand why consumer confidence has sunk to cycle lows when spending on essentials such as utilities and medical bills have to be funded by drawing down the personal savings rate. It is a sad state of affairs that transcends how traders react to a headline GDP report.

The reason the savings rate is being drawn down is because disposable incomes are now deflating. Every measure of real disposal personal income was negative.  The key gauge is real personal income excluding current transfer receipts, which was down 0.6% at an annual rate. This was the first decline since the economy was struggling to emerge from the grips of the Great Recession in the final quarter of 2009. This not only represents over 70% of national income but is also one of the four National Bureau of Economic Research (NBER) pillars of the cycle and the first to start tipping over. When the generals fall, one can reasonably expect the troops to soon follow.

So the hallmark of the Q3 GDP report is that a massive and unsustainable gap has opened up between incomes and spending, which is why I am feeling uneasy about it...If we don’t soon start to see personal income growth revive, then consumer budgets are going to be staring a contraction in the face, because there is a limit to how far the savings rate can decline in the face of still-weak home prices, as per the latest Case- Shiller and FHFA data...

Update:  Summary (10.28): As for yesterday’s GDP data out of the U.S., 80% of that 2.5% headline growth came from two sources — a slide in the savings rate and surge in spending in utilities and health care. In other words, it was a low-quality report, even if it met expectations.

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