The Sort Of Thing That Bear Markets Are Built Upon
We received the latest revision to the nation’s GDP report a few minutes ago. Buried within this report were the latest results for Corporate Profits.
Wall Street expected a decline, but nothing like what turned out. Corporate Profits fell to a negative 0.2%. They were indicating that we are already in a Profits Recession!
Wall Street’s number one measure for future performance just dropped into a recession level. It is the sort of thing that Bear Markets are built upon.
Today’s the day we get the scorecard for the entire economy. It’s the release of the second estimate of the Nation’s GDP, the total of the goods and services produced by you and me, and all the working people in the country.
Usually, this is a real snooze fest. It is, after all, the second reading of the GDP Report. It is a time for all the analysts and economists in the Federal Government to tweak those earlier numbers. Much of the data comes in via surveys, which go on constantly. So today’s reading will include some data that was unavailable last month.
Every time anyone tries to talk about this economy, inflation is a fly in the ointment. But this month could contain a real surprise. And that surprise could come from how the Bureau of Economic Analysis measures inflation. For today’s discussion, we’ll ensure that the Bureaucrats have fairly measured our output of goods and services. After all, that’s their job. They are constantly measuring total economic output. In other words, we’ll concede that they’ve nailed the production side.
But the side that can get away from any researcher is the most challenging variable: prices. Inflation, you see, is the number one problem in measuring this current economy.
Now, you’re probably thinking about now, that inflation is an easy thing to measure. We’ve seen inflation reported at over 8% in that third quarter. Third-quarter inflation averaged 8.3%
Well, not so fast. It turns out that’s different from how the Bureau measures inflation. And the reason this is so important is that GDP gives real growth in the economy. That is how much the economy is growing without inflation. So, whatever number we come up with for inflation will ultimately be subtracted from our measure of output to give us real economic growth.
So, we have a good handle on economic output. But where inflation stands can be a real stab in the dark. And that inflation number will provide the final calculation for the GDP.
So here is where the surprises come.
Just to let you know, the Bureau of Economic Analysis does not use the Consumer Price Index to measure inflation. They use a particular measure of inflation called the GDP Deflator.
In the second quarter, the Bureau reported that their measure of inflation, the GDP Price Deflator, was running at 7.3%. Not too far off, our CPI Inflation measure was 8.6%. 7.7% versus 8.6% is close. So far, so good.
But here comes the surprise.
In the third quarter GDP report, which we’ll be looking at this morning, our measure of inflation dropped just 1/10th percent. Hardly any move at all. You would expect that the Bureau’s measure of inflation would also show little change. Down just a little, but not much.
You would be wrong.
The Bureau dropped its measure of inflation by 350 basis points. From 7.7% to just 4.2%. They were cutting their measure of inflation almost in half. That’s an unprecedented reduction in inflation in the current environment. And it is nowhere near inflation as measured at the consumer level.
Why the big difference? I don’t know. But I can tell you this. If the Bureau’s measure of inflation were consistent with our CPI inflation, then the last GDP estimate would have been minus. And that would have been the third quarter in a row with negative GDP. A sure sign that the economy was in recession.
Of Course, it was likely only a coincidence that the last report on GDP was delivered just before the mid-term election. But no incumbent party would want to go into an election with GDP flashing recession.
But there I go, wearing my tin-foil hat again.
But if we see a significant revision in today’s GDP reading, with inflation suddenly pushed much higher, there may be something in my old tin foil hat.
So this morning at 8:30 East Coast time, we will get the second revision on GDP, with the third and final report to come next month.
A mixed picture is emerging for inflation in Europe. You’ll recall that yesterday we saw inflation slowing in all the States in Germany and Italy. Then earlier this morning, the Euro Area report showed an overall reduction in Inflation for the continent. However, we’ve also seen that inflation remains stubbornly high for the French and Italians this morning — no change in French and Italian Inflation.
We will get the latest US economy numbers in just a few minutes. First released will be the GDP report and then an entire raft of ancillary reports. We’ll focus on the GDP Price Index. But perhaps even more important for Wall Street will be the latest news on Corporate Profits for the third quarter. There are whispers that this could be a disaster, with profits coming in at half the rate of the quarter before. This is just the sort of thing that Bear Markets are built upon.
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