Q2 GDP and Trade data reviewed
The Q2 GDP numbers came out and some interesting trends pop up.
Before I dive into them, I want to point out 3 things:
1. Focus on trends not the exact numbers.
* The numbers always get revised. For example, the Q4 2007 GDP was just revised from a positive 0.6% to -0.2%. Is that a big difference? Yes and no. Yes, because it’s a contraction. Also, a 1% swing is $110B in real dollars. And no because once we are <1% style="color:#ff0000;">* Don't lose the forest for the trees: the direction is important. For 2007, we were seeing 4.8% growth, and now we’re struggling to stay positive. That is a big contraction.
2. The numbers are skewed by the stimulus package. $130B of stimulus checks happens to equal the exact growth in consumer spending for Q2.
3. Housing exaggerated the growth just as it is exaggerating the pullback.
This is very important to understand and I’ve pointed it out before. When I say ‘Housing’, I mean fixed investment in residential structures. The buying and selling of houses, not the spending on furniture and so forth.
For 4 years, housing prices rose ~20% each year. So the annual market went from $300B in Year 1 to $360B in Year 2. That added ~0.5% to the GDP. After 4 years, housing went from contributing 3% to GDP to suddenly meaning 6% of GDP. In 2005, quarterly residential was $600B+ vs $360B the recent quarter.
Naturally, as housing prices fall, that contribution drops. And it takes GDP with it.
Housing as a % of GDP
2006 5.0% (~$550B)
2007 4.1% (~$450B)
2008 Q2 3.1% ($370B)
So a slower GDP does not in itself mean anything about the broader economy. It just means that at least one sector is no longer contributing as much.
In the case of housing, the drop in value is quite large. The last 4 quarters saw $1.6T in residential investment vs. $2T the previous 4 quarters. Poof – there goes $400B of GDP contribution. Which really wasn’t anything productive – just trading.
I want to focus, instead, on which sectors seem to be rising and which seem to be falling.
Comparing Q2 2008 to Q2 2006, we see
Nominal Inflation adjusted
Food 0.4% no change
Gas 0.5% no change
Motor vehicles -0.5% -0.4%
Furniture -0.1% 0.6%
Medical 0.5% 0.3%
Non-residential
structures 0.7% 0.6%
Residential
structures -2.4% -1.9%
Transportation -0.5% -0.5%
High tech 0.2% 0.8%
Business
Inventories -1.2% -1.1%
Exports 2.2% 1.6%
Imports 1.5% -0.5%
Government 1.1% no change
By the way, 0.5% GDP growth is ~$60B in 2000 dollars. It’s meaningful.
Notice the anomalies.
As a rule, spending in nominal dollars is always higher than inflation adjusted. But somehow furniture and high tech spending in today’s dollars is a lot lower than it is in inflation adjusted dollars.
ALERT – that shows something is wrong with the adjusting done by government algorithms. In other words, the nominal numbers dovetail closer to reality:
1. Furniture spending is down not up. If people are not buying houses and foreclosures are in the millions, and furniture companies are going bankrupt, there is no way to believe that the spending on Furniture is up $100B in 2 years.
2. High tech spending is flat, not up. Again, with businesses in trouble, high tech is affected.
3. Imports are up a lot more. It's massaging the oil/gas prices at work. Oil and related products are only 25% of total imports in 2008 year-to-date but they are 55% of the total import growth. Neutralize growth in oil and you see the slower import growth.
Now look at the other anomalies.
It is simply wrong to say that, after inflation, spending on food and gas hasn’t grown. We know for a fact that gas prices have tripled but inflation is supposedly up only 7% in 2 years.
Stick with the nominal data.
Fine. So GDP confirms a slowdown in general, and specifically in a few places. Lets really call out which sectors are growing (and worth buying) and which are slowing (and worth selling).
Compare the 2008 year-to-date (Jan-May) exports with 2007 year-to-date, the top 20 growing areas are:
Item Change ($M) Change %
Fuel oil 7,572 157%
Nonmonetary gold 4,544 86%
Soybeans 3,697 96%
Petroleum products, other 3,471 46%
Civilian aircraft 2,922 16%
Wheat 2,784 115%
Corn 2,293 55%
Plastic materials 1,899 16%
Gem diamonds 1,768 38%
Telecom equipment 1,765 15%
Precious metals, other 1,699 53%
Chemicals-organic 1,593 13%
Steelmaking materials 1,477 37%
Meat, poultry, etc. 1,472 39%
Chemicals-fertilizers 1,433 63%
Materials handling
equipment 1,270 28%
Medicinal equipment 1,267 13%
Industrial engines 1,240 17%
Chemicals-other 1,186 14%
Toys, games, and
sporting goods 1,070 27%
Metallurgical grade coal 989 90%
Oil, food and coal rank as the fastest growth areas.
And the same comparison for imports:
Item Change $M Change %
Crude oil 56,797 39.4%
Fuel oil 5,462 31.7%
Petroleum products, other 3,005 14.0%
Liquefied petroleum gases 2,965 37.5%
Other household goods 2,681 10.4%
Industrial machines, other 1,775 11.5%
TV's, VCR's, etc 1,727 9.8%
Chemicals-organic 1,591 16.9%
Chemicals-fertilizers 1,560 29.5%
Telecom equipment 1,245 6.6%
Gem diamonds 1,241 13.9%
Steelmaking materials 1,239 30.3%
Industrial engines 1,210 16.4%
Nonmonetary gold 1,189 39.7%
Computers 1,051 6.0%
Food oils, oilseeds 1,008 47.0%
Medicinal equipment 980 8.9%
Engines-civilian aircraft 977 16.4%
Electric apparatus 863 5.6%
Feedstuff and foodgrains 839 42.7%
Except for oil and other energy items, import growth is pretty tepid.
Look at the sharpest drops in exports and imports. Exports show very minimal drop, in fact.
Item Change ($M) Change %
Computer accessories -1,115 -8%
Tobacco, manufactured -162 -30%
Logs and lumber -148 -7%
Apparel, household goods - textile -52 -3%
Finished textile supplies -51 -5%
Tapes, audio and visual -50 -19%
Hides and skins -32 -4%
Stereo equipment, etc. -23 -2%
Textile, sewing machines -21 -4%
Cotton fiber cloth -12 -1%
Vessels, excluding scrap -9 -22%
Leather and furs -1 0%
Jewelry, etc 4 0%
Spacecraft, excluding military 7 233%
Hair, waste materials 8 3%
Glassware, chinaware 8 4%
Fish and shellfish 9 1%
Sports apparel and gear 15 6%
Nursery stock, etc. 16 9%
Nontextile floor tiles 19 10%
Except for computer accessories, there is growth almost everywhere.
Now imports
Item Change ($M) Change %
Lumber -876 -42.2%
Stereo equipment, etc -815 -28.2%
Computer accessories -704 -2.6%
Business machines and equipment -685 -31.2%
Shingles, wallboard -657 -18.4%
Apparel, textiles, nonwool or cotton -600 -4.8%
Apparel, household goods - cotton -589 -2.8%
Jewelry -562 -11.2%
Household appliances -546 -7.1%
Bauxite and aluminum -414 -8.0%
Zinc -366 -41.0%
Furniture, household goods, etc. -358 -3.6%
Stone, sand, cement, etc. -352 -15.4%
Blank tapes, audio & visual -292 -38.4%
Nickel -278 -15.5%
Meat products -244 -7.9%
Motorcycles and parts -237 -14.6%
Camping apparel and gear -117 -3.7%
Alcoholic beverages, excluding wine -105 -5.0%
Plywood and veneers -97 -9.3%
Nontextile floor tiles -97 -9.1%
Newsprint -82 -8.3%
Quite a lot of consumer items are dropping: stereo, computer, clothing, furniture, jewelry, household appliances, motorcycles, alcohol, and so forth. And so are residential and non-residential related items
What's also interesting is that this represents $9.6B of fewer imports for 5 months. if this pace accelerates and even invades other areas, it's easily a $30B reduction in imports. That is noticeable to many of our trading partners.
Add it up and we see a lot of export growth, especially for commodity goods like oil, coal and some food.
We see a slowdown in imports, especially for consumer durables.
In my next post, I’ll show how I track this data back to the specific stocks in which we hold positions.
Before I dive into them, I want to point out 3 things:
1. Focus on trends not the exact numbers.
* The numbers always get revised. For example, the Q4 2007 GDP was just revised from a positive 0.6% to -0.2%. Is that a big difference? Yes and no. Yes, because it’s a contraction. Also, a 1% swing is $110B in real dollars. And no because once we are <1% style="color:#ff0000;">* Don't lose the forest for the trees: the direction is important. For 2007, we were seeing 4.8% growth, and now we’re struggling to stay positive. That is a big contraction.
2. The numbers are skewed by the stimulus package. $130B of stimulus checks happens to equal the exact growth in consumer spending for Q2.
3. Housing exaggerated the growth just as it is exaggerating the pullback.
This is very important to understand and I’ve pointed it out before. When I say ‘Housing’, I mean fixed investment in residential structures. The buying and selling of houses, not the spending on furniture and so forth.
For 4 years, housing prices rose ~20% each year. So the annual market went from $300B in Year 1 to $360B in Year 2. That added ~0.5% to the GDP. After 4 years, housing went from contributing 3% to GDP to suddenly meaning 6% of GDP. In 2005, quarterly residential was $600B+ vs $360B the recent quarter.
Naturally, as housing prices fall, that contribution drops. And it takes GDP with it.
Housing as a % of GDP
2006 5.0% (~$550B)
2007 4.1% (~$450B)
2008 Q2 3.1% ($370B)
So a slower GDP does not in itself mean anything about the broader economy. It just means that at least one sector is no longer contributing as much.
In the case of housing, the drop in value is quite large. The last 4 quarters saw $1.6T in residential investment vs. $2T the previous 4 quarters. Poof – there goes $400B of GDP contribution. Which really wasn’t anything productive – just trading.
I want to focus, instead, on which sectors seem to be rising and which seem to be falling.
Comparing Q2 2008 to Q2 2006, we see
Nominal Inflation adjusted
Food 0.4% no change
Gas 0.5% no change
Motor vehicles -0.5% -0.4%
Furniture -0.1% 0.6%
Medical 0.5% 0.3%
Non-residential
structures 0.7% 0.6%
Residential
structures -2.4% -1.9%
Transportation -0.5% -0.5%
High tech 0.2% 0.8%
Business
Inventories -1.2% -1.1%
Exports 2.2% 1.6%
Imports 1.5% -0.5%
Government 1.1% no change
By the way, 0.5% GDP growth is ~$60B in 2000 dollars. It’s meaningful.
Notice the anomalies.
As a rule, spending in nominal dollars is always higher than inflation adjusted. But somehow furniture and high tech spending in today’s dollars is a lot lower than it is in inflation adjusted dollars.
ALERT – that shows something is wrong with the adjusting done by government algorithms. In other words, the nominal numbers dovetail closer to reality:
1. Furniture spending is down not up. If people are not buying houses and foreclosures are in the millions, and furniture companies are going bankrupt, there is no way to believe that the spending on Furniture is up $100B in 2 years.
2. High tech spending is flat, not up. Again, with businesses in trouble, high tech is affected.
3. Imports are up a lot more. It's massaging the oil/gas prices at work. Oil and related products are only 25% of total imports in 2008 year-to-date but they are 55% of the total import growth. Neutralize growth in oil and you see the slower import growth.
Now look at the other anomalies.
It is simply wrong to say that, after inflation, spending on food and gas hasn’t grown. We know for a fact that gas prices have tripled but inflation is supposedly up only 7% in 2 years.
Stick with the nominal data.
Fine. So GDP confirms a slowdown in general, and specifically in a few places. Lets really call out which sectors are growing (and worth buying) and which are slowing (and worth selling).
Compare the 2008 year-to-date (Jan-May) exports with 2007 year-to-date, the top 20 growing areas are:
Item Change ($M) Change %
Fuel oil 7,572 157%
Nonmonetary gold 4,544 86%
Soybeans 3,697 96%
Petroleum products, other 3,471 46%
Civilian aircraft 2,922 16%
Wheat 2,784 115%
Corn 2,293 55%
Plastic materials 1,899 16%
Gem diamonds 1,768 38%
Telecom equipment 1,765 15%
Precious metals, other 1,699 53%
Chemicals-organic 1,593 13%
Steelmaking materials 1,477 37%
Meat, poultry, etc. 1,472 39%
Chemicals-fertilizers 1,433 63%
Materials handling
equipment 1,270 28%
Medicinal equipment 1,267 13%
Industrial engines 1,240 17%
Chemicals-other 1,186 14%
Toys, games, and
sporting goods 1,070 27%
Metallurgical grade coal 989 90%
Oil, food and coal rank as the fastest growth areas.
And the same comparison for imports:
Item Change $M Change %
Crude oil 56,797 39.4%
Fuel oil 5,462 31.7%
Petroleum products, other 3,005 14.0%
Liquefied petroleum gases 2,965 37.5%
Other household goods 2,681 10.4%
Industrial machines, other 1,775 11.5%
TV's, VCR's, etc 1,727 9.8%
Chemicals-organic 1,591 16.9%
Chemicals-fertilizers 1,560 29.5%
Telecom equipment 1,245 6.6%
Gem diamonds 1,241 13.9%
Steelmaking materials 1,239 30.3%
Industrial engines 1,210 16.4%
Nonmonetary gold 1,189 39.7%
Computers 1,051 6.0%
Food oils, oilseeds 1,008 47.0%
Medicinal equipment 980 8.9%
Engines-civilian aircraft 977 16.4%
Electric apparatus 863 5.6%
Feedstuff and foodgrains 839 42.7%
Except for oil and other energy items, import growth is pretty tepid.
Look at the sharpest drops in exports and imports. Exports show very minimal drop, in fact.
Item Change ($M) Change %
Computer accessories -1,115 -8%
Tobacco, manufactured -162 -30%
Logs and lumber -148 -7%
Apparel, household goods - textile -52 -3%
Finished textile supplies -51 -5%
Tapes, audio and visual -50 -19%
Hides and skins -32 -4%
Stereo equipment, etc. -23 -2%
Textile, sewing machines -21 -4%
Cotton fiber cloth -12 -1%
Vessels, excluding scrap -9 -22%
Leather and furs -1 0%
Jewelry, etc 4 0%
Spacecraft, excluding military 7 233%
Hair, waste materials 8 3%
Glassware, chinaware 8 4%
Fish and shellfish 9 1%
Sports apparel and gear 15 6%
Nursery stock, etc. 16 9%
Nontextile floor tiles 19 10%
Except for computer accessories, there is growth almost everywhere.
Now imports
Item Change ($M) Change %
Lumber -876 -42.2%
Stereo equipment, etc -815 -28.2%
Computer accessories -704 -2.6%
Business machines and equipment -685 -31.2%
Shingles, wallboard -657 -18.4%
Apparel, textiles, nonwool or cotton -600 -4.8%
Apparel, household goods - cotton -589 -2.8%
Jewelry -562 -11.2%
Household appliances -546 -7.1%
Bauxite and aluminum -414 -8.0%
Zinc -366 -41.0%
Furniture, household goods, etc. -358 -3.6%
Stone, sand, cement, etc. -352 -15.4%
Blank tapes, audio & visual -292 -38.4%
Nickel -278 -15.5%
Meat products -244 -7.9%
Motorcycles and parts -237 -14.6%
Camping apparel and gear -117 -3.7%
Alcoholic beverages, excluding wine -105 -5.0%
Plywood and veneers -97 -9.3%
Nontextile floor tiles -97 -9.1%
Newsprint -82 -8.3%
Quite a lot of consumer items are dropping: stereo, computer, clothing, furniture, jewelry, household appliances, motorcycles, alcohol, and so forth. And so are residential and non-residential related items
What's also interesting is that this represents $9.6B of fewer imports for 5 months. if this pace accelerates and even invades other areas, it's easily a $30B reduction in imports. That is noticeable to many of our trading partners.
Add it up and we see a lot of export growth, especially for commodity goods like oil, coal and some food.
We see a slowdown in imports, especially for consumer durables.
In my next post, I’ll show how I track this data back to the specific stocks in which we hold positions.
posted by Andrew at
1:16 PM
2 Comments:
Some of the items you said where imports are slowing are because there is deflation in their prices, not the quantity imported.
Most of the drops in imports are too large to be deflation. Can you be specific about which ones are just a drop in price?
Also, if it's a commodity, price drops indicate reduced demand.
Lastly, please consider that we wouldn't want to invest in a sector that is dropping in $ value - for whatever reason.
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