October 31, 2007
GDP report - 53 years record in… deflation?
Posted by theroxylandr under Economics, Finance, Investing, MoneyI am deeply confused by today GDP numbers. I was expecting that the masters of the universe will prepare GDP report to be a good excuse for today rate cut (or a good tool to pressure for a cut, because Feds do not participate in statistical exercises).
Why did they put the chain deflator at 0.8%??? To say that inflation is over and we can safely cut? But the games with decreasing chain deflator made GDP growth at 3.9% rate, definitely not a good number for a cut. It will be revised down and inflation revised up, later on.
The only possible answer I see is that the numbers were not cooked and we do have a chain deflator at 0.8%. If you look at the chart it’s scary (today number is not plotted yet):
The last time the chain deflator was at 1% it was in 1998 (green line), it never happened even during the deflationary scare of the last recession. We just fell off the cliff straight to the off-the-chart record, below LTCM and Asian Currency crisis deflation scare. The last time the chain deflator was below 1% it was in 1954, we’ve just made a 53-year record.
That means all the pricing power is quickly evaporating and while there is a lot of production in the pipeline the final consumption has to be showed in by the lower prices.
We got a flat tire while driving in the left line on the highway, at full speed. I think Feds must cut today but it won’t help
October 31, 2007 at 10:02 am
I won’t discount a 50bp cut today, though I’m voting for 25bp. And I think the Fed funds rate of 4% by the end of the year.
October 31, 2007 at 11:47 am
are you saying that if the GDP deflator had remained at 2Q’s 2.7%, Q3 GDP growth would be 2.0% (3.9 + 0.8 - 2.7 = 2.0).
October 31, 2007 at 11:55 am
Could this be down to people spending more of their income on *cheaper* goods than before, i.e. going for the cheap options rather than the expensive ones? That ties in with the story we’ve been getting from consumer confidence numbers.
October 31, 2007 at 12:20 pm
the taylor rule implies a big cut today:
http://www.investors.com/editorial/editorialcontent.asp?secid=1502&status=article&id=278203233970884
is gold seeing a further and farther usd decline? i just can’t figure anything out. or, could we see a huge sell off in gold with a less than anticipated cut…
opinions appreciated! thanks.
October 31, 2007 at 12:41 pm
to add to my previous comment, i am very confused. interest rates already ARE low… and with them we’ve seen the a 35% debasement in the usd as well as credit creation that defies the imagination.
October 31, 2007 at 1:09 pm
This low GDP deflator number implies that real interest rates are higher than last quarter…
October 31, 2007 at 1:20 pm
>>> Could this be down to people spending more of their income on *cheaper* goods than before, i.e. going for the cheap options rather than the expensive ones?
Yes, this how the deflator is calculated. If oranges are getting too expensive and people switch to apples the deflator reduces the weight of oranges and counts more of apples.
October 31, 2007 at 1:27 pm
If they leave the chain deflator at .8%, this means it is a good time for a rate cut, right? IMHO, the Fed needs GDP at 3.9 to support the dollar, otherwise the dollar continues the freefall. If GDP comes in hot, they can cut without killing the dollar too much. I guess they’re trying to make everyone believe (without actually saying it) that the real reason for the cut is the problems in the financial sphere and not in the economy. Unfortunately, problems of this magnitude in the financial sphere will inevitably transmit to the real economy, especially when there is this much debt floating around.
You’re comment about pricing power evaporating is right on. Valero CFO was on CNBS the other day talking about this. He basically said that their margins are getting squeezed due to $90/bl oil but that the puke point for gas prices has basically been reached, so Valero can’t pass on the additional cost without hitting the demand side of the equation. He said that $60/bl was the true value of oil not $90, but speculators were driving up oil artificially. This fits into Russ’ theory of a crack-up boom.
October 31, 2007 at 7:53 pm
I totally agree with Valero CFO and I think we’ll see the $60 oil at some point next year. I’m still holding my oil stocks as inflation hedge but at some point I’ll sell.
October 31, 2007 at 8:36 pm
Everyone said today that bulls celebrated the Fed cut. That’s true.
But bears are celebrating as well. My main short positions are in XHB, Bkuna, DSL and $MFX. All of them are down today, so both my short and long positions are in profit today.
October 31, 2007 at 10:34 pm
Maybe it reflects the lack of money in the financial system. We never hear about the World Wide Saving Surplus anymore, that was a daily/weekly mantra from the financial establishment. The ABCP. SIV, MBS problems have destroyed a certain amount of leveraged credit and real money now the hording of cash.
Wild speculation on my part!