San Diego Housing Bubble News and Analysis

My take is that this signals a reduced probability of recession in 1Q 2007. Perhaps recession will be staved off until later in the year, or the dreaded soft-landing scenario will occur.

At least they predicted a positive GDP, Powayseller on the other hand predicted a negative or ZERO GDP for the quarter.

FSD,

I wouldn't go rushing off to the "soft-landing scenario" based on Quarterly reporting of GDP... this macro-economic analysis is a tough gig. There are so many different ways to spin macro data...

GDP is up = economic recovery = housing recovery.

OR...

GDP is up = inflationary pressures typically follow = higher interest rates = downward pressure on housing prices.

I wonder why so many economists are wrong all the time... too many moving parts.

By soft-landing, I meant for the overall economy, not necessarily housing, which I think will continue to drag the economy. For what it's worth I think that recession in 1Q 2007 as defined by negative GDP growth for the quarter is not likely, and more likely to happen later in the year.

As for the two spins, I have a twist on your second one ...

GDP is up = inflationary pressures follow = higher interest rates = higher rents
continued, but no increase in downward pressure on housing
(inflation/rents counteracts interest rate increases).
So, housing remains 20% overvalued and still due for more correcting.

FSD, I wouldn't be so quick to breathe a sigh of relief; GDP growth was revised upward due to (1) higher inventory (which means lower production in the future, and which reflects the downward revised Q3 personal consumption) and (2) lower imports (not important; bounces around). If you look at the press release, the numbers are ugly.

http://www.bea.gov/bea/newsrelarchive/2006/gdp306p.htm

18% drop, quarter to quarter, in housing outlays.  Non-residential outlays held up in Q3, but I've seen data elsewhere showing that Oct. saw a slowdown.  And, I vaguely remember seeing somewhere (from ps?) that some of the computer companies, this week, announced a disappointing outlook for sales.

No, there was nothing positive in the revision of Q3 GDP, in my opinion.

JG -

Yes, some stealing of Q4 GDP into 3Q via inventory, so expect weaker 4Q. Thanks for the link. I wonder if Bernanke read it.

JG,
I went through the report this morning and you are right that it doesn't equate to immediate soft landing but if you remove the 0.4% number due to added inventory, the number comes out to be the same 1.8% as expected by the consensus of economists. The same economists now predict Q4 GDP to be 2.6%. In general, no matter how you spin it, it is better news than the original 1.6% GDP number. But folks here have been trying to point out the same thing to ultra bears around that there are too many moving parts to accurately predict macro economic numbers. Yes, we are headed into 2007 very cautiously, there are signs of slowdown and possibly recession but don't make predictions like GDP will be 0% in Q4 or SP500 will be 600 by Q12007.

Roubini is getting a beating on his blog for previously drumming up the fact that his forecast of Q3 GDP of 1.5% was closest and consensus forecast(1.8%) was wrong. I think Roubini deserves the criticism he is getting and cannot use excuses like high invesntories, imports, etc in the report today. The way he strongly pedicted 1.5% sounded as if he should have known and factored all these things into his prediction. If he didn't knew about these, he should have been far more cautious in his predictions.

If an economist selectively ignores components when they go against their view, do they also ignore them when they support their view. Auto sales added significantly to the number this time. What were people saying when auto sales decreased the GDP last quarter ? That the consumer was tapped out and this was a leading indicator ! What does it mean now.

While we may disagree whether the glass is half full or half empty, can we at least agree that it is at 50% capacity.

GDP was a bit higher than expected, but not great. Housing trimmed it significantly since the beginning of the year. Roubini will eventually be right about a recession, it's just that his timing may be off by a month, 6 months, a year or 2 years. After all, he is an economist. After it happens he'll explain why.

GDP is up because inventory is higher than originally forecast. That is bad news. Rising inventory is another sign of economic slowing. Inventory piles up because spending is down. (The second reason is lower gas prices, which reduced our imports, so that is good.) It seems that manufacturers were slow to adapt to reduced demand from consumer, so they kept making stuff, increasing GDP. But if you can't sell the stuff you made, you're going to be happy about the economy because you made it? That doesn't even make sense.

PS -

If you read the report it states that "The real change in private inventories added 0.16 percentage point to the third-quarter change in real GDP ..."
So, the inventory increase that you are citing added 0.16 to the GDP.

So, let's discount the 0.16% due to inventory increase and we get a GDP revised upward to better than 2%% from 1.6%. Still not great, but better than previously thought.

So the invenotries contributed, but over 70% of the revision upwards came from other factors. What are these factors ?

Poway,
You are right about invesntory build up and it probably explains why the durable goods numbers went down yesterday because manufacturers are probably waiting to clear inventories. However, even if you exclude the effect of higher inventory, the GDP number would come out to be closer to 2% which was closer to the consensus estimate by bloomberg. The same consensus for Q4 now is 2.6% I guess. BTW, Beige book pointed to moderate growth and didn't show any frightening signs of recession, inflation and labour cost estimates were reduced, corporate profits hit record highs in Q3 (31.4%), buisness spending revised upwards, commercial construction revised upwards, etc. On the other hand, consumer spending was revised downwards and most of that contributed towards services which is good for jobs but bad for factories/retailers. So its a mixed bag.

... the other factors

Upward revision were due to
1. reduced imports
2. increased personal consumption expenditures for services (remember we are a service dominated economy)
3. inventory investment

The upward revision was partially offset by downward revisions due to:
reduced personal consumption expenditures for durable goods.

So people bought fewer durable goods (reducing the GDP), but more than made up for it in Personal Consumption Expenditures for services, along with the reduction in imports.

Net result. More growth than previously thought. The inventory issue is relatively small potatoes, 0.16% of the increase, and has been overblown.

I agree the quarter to quarter trends are not strong, but the 3rd quarter wasn't as bad as previously thought.

qcomer -

My post crossed yours. We came up with the same result. Ignoring the inventory contribution 3Q GDP is still above 2%.

Business is carrying more as the consumer weakens. This will likely prolong the timeframe before a recession will hit.

Today, Roubini, "Deutsche Bank is now revising down its U.S. Q4 growth forecast to 0% from its previous 1%:

In light of continued weakness in the economic data, we are cutting our fourth quarter real GDP growth forecast to zero from the +1.0% that we were originally predicting. This is largely due to weakness in durable goods shipments and orders, but also due to weak consumer spending..." which is not gettting the hoped-for boost from falling gasoline prices.

qc, it still feels like 0% to me. Wager: beer at the next get together? Me at 0%, you at 2.6% for growth in Q4 06 GDP?

jg, next thing you know, Daniel and davelj will ask you to put up $10K to prove that you really mean what you say :)

No, PS, I won't. I actually agree with jg. But even if I didn't, his assertion is not nearly as outlandish and uninformed as your assertion regarding ARM defaults. But find me something equally silly and I'll be happy to take the other side of the bet. That's what investing is all about after all: finding assymetric bets, where your downside is limited and your upside is several multiples of the downside, based on reasonable probabilities.

davelj, Roubini quoted me on his blog this week. So I'm not as dumb as you'd like to think. And I know you're pretty smart too. So let's put our heads together, as we should in the piggington community, and figure out what are the chances of those FBs actually being able to pay off one of those loans (meet me at the ARM thread for that one). What is your prediction for GDP?

Oh, puhleeze, ps.

"if you exclude the effect of higher inventory, the GDP number would come out to be closer to 2% which was closer to the consensus estimate by bloomberg. " - qcomer

"That's what investing is all about after all: finding assymetric bets, where your downside is limited and your upside is several multiples of the downside, based on reasonable probabilities." - davelj

"Roubini quoted me on his blog this week. So I'm not as dumb as you'd like to think. And I know you're pretty smart too. " - PS

"Oh, puhleeze, ps." - jg

Now we've all been quoted.
Have a superior Friday.

ISM numbers today slid below 50 indciating manufacturing is contracting for the first time in 3 years. If this contraction is confirmed in next data point as well then I would admit my recession call for late 2007 may have been a bit off because I didn't expect this number to go below 50. We may hit something ugly 1H 2007. I am a firm believer in the ISM numbers because strong manufacturing provides jobs which fuels consumer spending.

Maybe this is an outlier and if we get the same below 50 number next time, we are definitely in troubled waters. To be clear, since 1960, such contraction in manufacturing activity has always led to a recession. I locked some of my 2006 gains today. The market seems to think the same as SP500 is testing 1400, Naz is testing 2400.

Good summary, qc.

But, the important question is: are we on for a wager of a beer? I win if Q4 '06 GDP growth comes in at 1.2% or below (mid of 0-2.6%), you win if it comes in at 1.3% or above?

Simple, frugal bet for a simple, frugal guy like me.

Just in case someone misundertands my bet "rant" on another thread, I'm totally fine with (and fond of) this kind of wager.

(not that it matters what I think one way or another)

and jg, why are you giving up the .0999999999999999999999999999? Seems to me like that could matter!

ISM reading implies 2.4% GDP growth

qcomer -
The current ISM reading of the Purchasing Managers Index is 49.5 (yes manufacturing is contracting slightly since less than 50).

However, the ISM states that this number is consistent with GDP growth of 2.4%, based on past relationships.

Here's a quote : "In addition, if the PMI for November (49.5 percent) is annualized, it corresponds to a 2.4 percent increase in real GDP annually."

So, the news is the same as the GDP being in the 2-2.5% range, which we already knew. This simply confirms that the economy is slowing at the same pace according to this report as the GDP report previously suggested. (Yawn)

Here's the report for more details : < a href="http://www.ism.ws/about/mediaroom/newsreleasedetail.cfm?ItemNumber=15697&navItemNumber=12942" > ISM Report

sdc, I'm willing to give up the 0.1% because I have some confidence that things are slowing (despite FSD's attempts at puffery, otherwise!).

See, there you go rounding again! Well, I'd admire the confidence.

jg -

To what puffery are you referring ?

ISM of 2.4% for Q4 sounds like puffery (highlighting the positive) to me, who sees little light (reasonable auto sales) and much dark (falling housing, falling commercial construction, falling manufacturing, etc.).

I use the term 'puffery' in a light sense; if I said you were practicing 'quackery' (and I'm not), then you should take offense with me, FSD. Take no offense with 'puffery,' FSD.

jg - Absolutely no offense taken. I was trying to figure out whether you were referring to my factual statements citing the numbers and explanations published by the ISM (I wouldn't consider that an example of puffery) or my previous tongue-in-cheek jest of quoting everyone so that we could feel superior (now that should be considered a puff piece).

I didn't think I was overaccentuating the positive. Things are obviously slowing down. I like to interject facts now and then to provide some balance. I like to read the reports rather than regurgitate someone else's take on them. The ISM report was consistent with the 2.2% revised GDP of last quarter. It was not a sign of further slowing beyond that ... yet. Some people took the ISM number as indicating we are already over the cliff. I'm simply claiming that we are at the same edge of the cliff we thought we were when the GDP was revised to be ~2.2%.