The headline GDP growth was pretty good, 3.4%, but you don’t to dig deep to see the sharp deterioration in numbers.
We need to concentrate just on two series: personal consumption expenditures and nonresidential structures investments:
I 06 II 06 III 06 IV 06 I 07 II 07
Personal consumption 4.4 2.4 2.8 3.9 3.7 1.3
Structures 15.0 16.4 10.8 7.4 6.4 22.1
Most of the GDP components are either coincident or irrelevant indicators, except those two above.
The personal consumption is the leading indicator, because, as shown in the “Ahead of the curve” book, it leads the chain of events in the cycle and is pretty good in predicting the bear stock markets. As you can see the consumer is struggling, which spells trouble in the nearest future.
In opposite, the non-residential capital expenditures, especially in structures, is strictly trailing indicator, meaning it usually peaks when the economy is very close to recession, sometimes it even peaks during recession. The reason is, the decisions to invest into new production facilities are usually made at the top of the economic cycle. The completion takes from 10 to 30 months, so it is pretty typical to see new factories and office buildings to be opened during early recession months. So the 22% increase in structures are, actually, bad news
The economy is clearly heading into recession and today GDP release is a good confirmation
July 27, 2007 at 10:39 am
This is good analysis. You are the smartest guy in the room!
July 27, 2007 at 5:17 pm
Another excellent post! I heard on Bloomberg radio this morning that a lot of construction jobs are moving from residential into commerical construction. This is probably why there wasn’t a significant blimp in unemployment as the residential contruction declined. I have noticed a significant number of new commerical construction projects in my region. A couple of new large supermarkets and about a dozen new strip malls currently in various states of construction. Since most of these commerical buildings are very dependant on consumer consumption, I have a strong suspicion, that a large number of buildings will have vacant signs much longer than the developers have anticipated.
Also the see that the CMBX spreads have all gone vertical.
July 27, 2007 at 6:09 pm
TechGuy,
Good points, all. Here in Sacto we have fields of empty strip malls and commercial office buildings all over the place and yet, these things are still sprouting up like weeds. Residential started crashing pretty hard last year and the market has come to a virtual standstill. All of this heading into a colossal credit crunch.
I understand why builders build. This is what they do, and if they stop building, there’s really no reason for them to even be around. Also, it could be argued that it’s still better to have a finished development than just empty dirt, because then at least you have a chance of selling the property. Having said this, I still believe that we will have entire developments (both residential and commercial) that sit and sit for years on end, and become virtual cities for vandals, squatters, criminals, and teenage partygoers.
July 27, 2007 at 6:10 pm
Sorry that was me above.
July 27, 2007 at 8:01 pm
[...] GDP numbers – grim picture The headline GDP growth was pretty good, 3.4%, but you don’t to dig deep to see the sharp deterioration in […] [...]
July 29, 2007 at 8:03 am
WOW, It’s been grime for over 4 years, when people are using the equity in their homes as checking accounts….”Block the door Nellie”….t
July 29, 2007 at 11:55 am
Found this tidbit of info about rising commerical real estate delinquencies:
http://online.wsj.com/article/SB118554771673180353.html
“CMBS delinquencies rose 13% in the second quarter to $1.65 billion from $1.46 billion in the first quarter, according to a new report by Standard & Poor’s, which attributes the rise to overaggressive loans made in 2006, as well as increased problems in the retail sector.”
So this may hint that the commerical real estate market is probably lagging the residental market 9 to 12 months. Although it appears from the CMBX spreads that investors worries about the residental market are leaking into the commerical side.
July 29, 2007 at 2:04 pm
>>> So this may hint that the commerical real estate market is probably lagging the residental market 9 to 12 months
I think it could be even more than that.
By my understanding the commercial real estate defaults are coincident with decline of corporate earnings. The investments are trailing that, because even after the defaults increase the projects in the pipeline must be finished.