Conclusion: With U.S. GDP likely coming in lower than “expected”, we continue to stay long of The Inflation via gold and oil as slower growth will give The Bernank cover to remain Indefinitely Dovish.
My ever astute colleague Darius Dale circulated the attached chart to our internal team earlier today. It is a chart of Bloomberg Consensus estimates for Q1 Real GDP growth. These estimates have been falling, and falling hard. Currently, the consensus estimate for Q1 growth is 2.6% and peaked at close to 3.5% in late March of this year. Now with most of the data in the books, the “sell side” has dropped their estimates dramatically. After the fact estimate revisions aren’t exactly helpful, but it is endemic of Groupthink on the sell side.
On November 11, 2010, we wrote a note, following a thoughtful discussion with former Peter Orszag, that outlined why GDP growth would likley be lower than expected in 2010 (email us for a copy). The key reasons were as follows:
- The inventory cycle is going the wrong way in the first part of 2011; moving to net-neutrality towards impact on GDP growth. As a side note, Orszag noted that the sequential improvement in GDP in Q3 was unintentional as some firms were caught out by the slump in demand during the summer and unintentionally built up inventories in Q3. That trend, Orszag expects, will reverse itself in Q4 and the early part of 2011.
- The Recovery Act, despite the controversy, added 2%+ to GDP in 1H10. By design the act was to have all the money “out the door” by the end of September and succeeded in doing so. Going forward, the cost of the Recovery Act will be net neutral and eventually as it ramps down and, eventually – in terms of cash flow – will be net negative to GDP growth.
- The final factor is State and local deficits which are projected to be $100 to $150 billion a year for the next two tears. Going forward, a much smaller share of which will be offset by federal subsidies, therefore a much larger share will need to be closed through tax increases and spending cuts at the State and local level.
Coincidentally, right around that time, Hedgeye Macro was sounding the alternative alarm bell of “Growth Slowing as Inflation Accelerates”.
The implications of these key factors are anemic GDP growth (as the sell side is now realizing) and stagnant employment improvement. In aggregate, this likley provides cover for the Federal Reserve to stay Indefinitely Dovish.
Daryl G. Jones