Before the Pool Room, a quick comment on Australia’s recent 0.4% growth in GDP in the first quarter of 2009–largely due to a surprise growth in net exports–and the sequel the next day of a surprise trade deficit.
Briefly, the “textbook” definition of GDP is:
GDP = C+I+G+X‑M
“GDP equals Consumption plus Investment plus Government spending plus eXports minus iMports”
M fell by 9 billion, X (more on this below) fell by 3 billion, so there was a +6 billion turnaround in the “net exports contribution to GDP” (as it’s known).
Now for a healthily growing economy, all 5 factors (C,I, G, X, and M) would be increasing–including M, since lots of the C+I+G are spent purchasing them. But suddenly spending on imports has dropped $9 billion in a quarter–that’s of the order of 2% of GDP. That implies that spending has dropped, not risen. This is not what I call a sustainable “growth” pattern.
Secondly, the increase in the volume of exports that was spruiked when the GDP figures came out was not all that it seemed. Gerard Minack of Morgan Stanley claimed that there had been a change in ABS methodology which led to the volume of commodity exports bring substantially overstated. That claim has now been rejected by the ABS, but as discussion of this on Peter Martin’s site indicates, there are still very large problems with estimating the volume of exports given the extreme volatility in commodity prices and exchange rates.
Part of the ABS’s reply to Gerard’s article in The Age implies that this unreliability of export volume calculations will continue for some time:
The volume measures of exports of bulk commodities … are calculated by multiplying the quantities of such exports, as reported by exporters in tonnes or some other unit of quantity, by the average price of such commodities, as reported by exporters in the reference year. For the March quarter 2009 volume estimates, 2006-07 is the reference year for prices. The reference year prices are updated annually, in the September quarter accounts. For example, the September quarter 2009 accounts will use average prices reported in 2007-08.
So the estimates for the September quarter GDP will be based on prices as reported in 2007-08… Given the volatility of prices in the last four years–a huge increase in our export prices followed by the recent sharp decline that will doubtless continue for some time–calculations of the real value of exports will be extremely inaccurate for some time to come.
Given all that, I expect that the exported tonnage of commodity exports probably fell significantly across the board in the most recent quarter, and the recorded increase was an anomaly.
This explains the “huh” factor of the very next day’s announcement that we had gone from a substantial trade surplus to a deficit. How does that tally with the “increase” in exports in the GDP figures? The trade deficit is the dollar value of exports minus the dollar value of imports–there is no “price deflating” going on.
So putting this all together (looking just at C+I+G+X components), the probable outcome for real output in the last quarter was a fall of the order of 1–2%, or an annual rate of decline of 5–8%.
Note also that there are severe problems with US data, though not caused by its export prices but the practise followed by the BLS of modifying unemployment numbers using its “Birth and Death” model for changes in the small business sector in the USA that are too small to be captured by surveys. This adjustment accounts for 220,000 of the jobs created in the USA in the month of May–when aggregate jobs actually fell by 345,000. So without the adjustment–a statistical procedure to account for a weakness in the survey method used to estimate unemployment–recorded unemployment would have increased by 565,000. This would have turned a “surprisingly good” decline in jobs number there into a “depressingly familiar one”. See Mish’s site for an excellent discussion of this.
PS Gerard has apologised for his error–as I noted to a discussant here when the ABS’s letter was brought to my attention, it’s very rare for him to make such a mistake, and he has since duly apologised in his Down Under Daily.Here’s what he had to say:
Now over to Evan’s selection for The Pool Room this week…
THE POOL ROOM – Week Ending Friday 5th June, 2009
AUSTRALIAN-RELATED LINKS:
Australia Dodges Recession Bullet, ABC, 3 Jun
Irrespective of whether Australia is in recession or otherwise, it’s a good time to remember that official GDP growth ignores debt growth. So, yes, maybe Australia “grew” by 0.4% in Q1 so long as you ignore the unprecedented government spending, including cash handouts before Christmas. If you or I go mad with a credit card, buy a flash car courtesy of EZY-Finance Ltd and take out a home equity loan (remember those?) the only thing that grows is our debt burden. It appears to be different for countries who borrow and – wallah! – their GDP has grown and it’s time for the PM to stand on his imaginary aircraft carrier and call a press conference. Gerard Minack also notes that the ABS spruiked the figures.
Trade Slump Undermines GDP Optimism, ABC, 4 Jun
The bullets are starting to hit the mark: “Official figures show a sharp slump in exports has dragged the $2.3 billion trade surplus in March to a deficit of $91 million in April… imports fell 2 per cent to $21.77 billion in April, with capital goods, such as trucks and machinery, down 1 per cent while consumer goods decreased 1 per cent.” Export prices don’t look like improving as today “Gloucester Coal has agreed to sell coking coal to its Japanese customers in the coming Japanese financial year at prices more than 60 per cent lower than the previous period.”
Ore to China Not Driven By Demand, The Australian, 4 Jun
Maybe China won’t be our great red hope after all. “The record iron ore exports to China that helped Australia dodge a recession have been driven by speculation and anticipation of demand by steelmakers that has not yet eventuated.” Ring any alarm bells (hint: oil prices last July)? And in another article “China’s government said unemployment is worsening, a quick rebound in trade is becoming less likely, and the nation is yet to feel the full effects of a global slump”. Michael J Panzer chips in with some more holes in the China recovery story. Contributed by Macca.
House Prices NOT Tipped To Rise, Michael Pascoe, SMH, 3 Jun
A bona-fide brickbat at last, an article that should produce as much laughter as Geithner in front of an audience of Chinese students. Pascoe lauds the economic modelling might of the RBA, APRA and Macquarie Bank because their computers are bigger! Yes, that’s the same mob whose intellectual fire-power left them worried about an over-heating economy about 45 minutes before the onslaught of the “worst financial crisis since the Great Depression”.
Families Prosper From Tariff Cuts, Mark Davis, SMH, 1 Jun
“The study by the Centre for International Economics also predicts that if governments around the world succumb to protectionist pressures and increase tariffs on imports to preserve local jobs they will only make the global recession worse.” So the de-industrialisation of Australia is set to continue. Why produce physical goods when you can rely on global wholesale finance to fund the debt bubble, “hot money” inflows to keep the currency and stock markets strong and the selling off of primary industry to foot (some of) the bill? Both the Libs and Labor support this view.
Credit Law Revamp Could Cost Jobs, Glenn Milne, Sunday Telegraph, 31 May
“The key change is that the onus for proving credit worthiness will shift from the customer to the lender. So if you sign up to a credit deal which you clearly cannot afford it will be the bank, or retailer that has to repay the loan.” An important and under-reported story spun as a threat to jobs by Harvey Norman, PwC and the sub-editors. Apparently the large institutional interests want to protect small businesses and tradesman from a new law – now there’s a red flag if ever I’ve seen one. In bygone days it was considered self-evident that creditors needed to share responsibility with debtors for debt issuance. Not anymore.
Australia’s Foreign Debt – Data & Trends, Tony Kryger, Australian Parliamentary Library, 7 May
Contributed by blog member BullTurnedBear. Extremely useful research paper examining Australian debt. Key figures: total gross foreign debt in 2008 was $1.07 trillion ($600b net) having risen from only $8b in 1976; over the same period foreign debt has skyrocketed from 9% to 95% of GDP; 74% is owned by financial institutions; the largest creditors are the UK (23%) and the US (22%; 39% is denominated in AUD, 31.5% in USD, and 13% in euro; 48% has a term less than 1 year, including 37% which is due within 90 days.
Big Is Better For Super, SMH, 4 Jun
More delusional tub-thumping by the Ponzi crowd. “[Deloittes] said the better performance from bigger funds could be attributable to better education of members, which allows them to manage their holdings more wisely. “ You couldn’t make it up. One fact is beyond question: “Big Is Better” for commissions.
GLOBAL ECONOMY / BANKING / FINANCE:
Consumer Spending Falls As Americans Boost Savings, Bloomberg, 1 Jun
Deflation watch. Despite those green shoots this show is running right on script. The US savings rate was negative at the height of the housing bubble. Now it’s shot up to 5.7% – at the expense of marginal consumption and short-term GDP. Now some May spending data has emerged and, yes, same-store consumer spending fell 4.6%.
From the Sub-prime To the Terragenous, Land Values Research Group, Gavin R. Putland, 1 Jun
Excellent research paper providing strong evidence that a downturn in the domestic property market is a leading indicator of recessions. Contains useful housing bubble and recession data for 32 countries.
Mortgage Meltdown, More Pain To Come, Mike Shedlock, 31 May
If these graphs don’t frighten you, nothing will. Check out the sub-prime resets, Alt‑A resets (“there are $2.4 trillion of Alt‑A resets and they are mostly ahead of us”); and option ARMs. Note that “Wall St mortgages are 15% of all mortgages, but are 51% of all highly delinquent mortgages.”
More Prime Foreclosures, More Re-defaults, Mike Shedlock, 31 May
More of the same. “The problem is not on that “front-end” ratio [mortgage repayments], but on the back end, which is all of the borrowers other debt (credit cards, car loans, student loans, etc.)… other debt is so high that most of today’s troubled borrowers cannot afford any loan payment at all, even at a very modest debt-to-income ratio.”
Pending Home Sales: Watch the Birdie, Denninger, 2 Jun
In his inimitable style, Denninger calculates the impact of rising retail mortgage rates on the US housing market. Now contrast this to an article in the SMH this week: “April Pending Home Re-sales Surge 6.7% In US”. Zero Hedge thinks that the future of the National Association of Realtors must be really, really, really bad. And on 4 Jun Bloomberg reports that US mortgage rates jump to highest since December, to 5.29 from 4.91 percent a week earlier.
The Housing Rebound As Traded By An Insider, Zero Hedge, 3 Jun
“… [homebuilder Toll Brothers’s] chairman decided to provide some optimism during his Q1 2009 earnings call and then proceeded to dump stock not once, not twice, but seven times in a span of one month.” It’s Enron all over again.
US Auto Sales: Worse and Worser, The Big Picture, 3 Jun
Look at the data in the link above and then look at this headline courtesy of the SMH: “US Car Sales Stabilise”. It contains such gems as: “Total US car sales were down 33.7 per cent at 925,824 vehicles compared with May 2008… but carmakers took comfort in the fact that the seasonally adjusted annualised rate of 9.91 million was the industry’s best performance this year.” Similar delusions led to the demise of the US car industry.
The Big Mess [GM], Daily Show, 3 Jun
Another brilliant must-see segment from Jon Stewart at Comedy Central. Much more informative than Bloomberg. If you missed it the first time, also watch Stewart take out Jim Cramer – part one, two, three (hit “replay” if the video doesn’t work the first time).
Obama Saving GM Needed Dealmaker Team to Break It In Bankruptcy, Bloomberg, 1 Jun
Possibly the worst case of MSM propaganda in the history of the GFC. Obama calls in his Wall St donors to restructure GM, as they were so awesomely successful in their day jobs. “We were told from the start to impose the same commercial rigor on this restructuring as we would have done in the private sector.” “The tools Obama was asking the task force leaders to use were honed over their years of dealmaking.” “For these kinds of restructurings, it makes perfect sense to bring in the people who know how to execute.” Don’t read before eating. More from GM.
Spanish Slump Stokes Debt Dilemma as Jobless Rises, Bloomberg, 3 Jun
Deflation watch with paella. “As Spain sinks deeper into recession and the jobless rate heads for 20 percent, the highest in Europe, employers are telling workers to accept wage cuts if they want to stay competitive. That’s making it harder for households to tackle a debt load built up during the country’s economic boom and equivalent to 18,000 euros per person.”
U.K. House Prices Unexpectedly Jumped by 2.6% in May, Bloomberg 4 Jun
Statistics 101: when it suits your argument, adjust for seasonal trends; when it doesn’t (like now), ignore seasonal trends like the usual jump in house sales coming into the summer months. Alternative headline: “In the three months through May, prices fell 16.3 percent from a year earlier.”
Oil Jumps on Bullish Goldman Forecast, Dow Jones, 5 June
Banking 101: get bailed out by your ex-CEO sitting in Washington; help yourself to $12.8 trillion; collude with your mates and use the bailout money to hire tankers to store oil while the price is cheap and to reduce supply; then have your research department talk up the price; sell later; enjoy bonus. It also helps to buy influence.
Fall In Private Borrowing, Brad Setser (CFR), 2 Jun
US consumers are trading consumption for saving (up from negative in 2004 to over 5% now). The US government has stepped in to keep the Ponzi scheme from collapsing. This supports Doug Noland’s view that the US government is trying to replace the housing bubble with the Government Finance Bubble.
Profile of a Collapsing Bubble, sourced from Jesse’s Americain Cafe, 4 Jun
Looks like we’re at “Return to normal”. Good time to pile back into the ASX. The Australian contained a sensible discussion on stock markets this week (no, not from Charlie Aitken).
Naked Short Selling Redefining Systematic Risk, Deep Capture, 6 May
Another fantastic video (under 20 mins) from deepcapture.com. In places like India they pay off politicians with paper bags full of cash (literally). In the west they do it this way (the article is from 1994 and will only make sense after watching the video and understanding the role of REFCO.)
Jobless Benefit Rolls Fall, Initial Claims Dip, Yahoo Finance, 4 Jun
More green shoots psychology. Forget the GM bankruptcy and the impact on one of America’s last remaining productive industries because “the tally of first-time claims for jobless benefits declined to a seasonally adjusted 621,000 from the previous week’s revised figure of 625,000.” The SMH even inserted claims of productivity improvements into their headline. Watch out for next month when the May jobless figure is “adjusted” upwards, just like every other month – here’s an example.
The Chicago School Is Eclipsed, The Week, Brad Delong, 29 May
Excellent article. “Richard Posner, leader of the Chicago School of Economics, uses his new book, “A Failure of Capitalism,” to try to rescue the Chicago School’s foundational assumption that the economy behaves as if all economic agents and actors are rational, far-sighted calculators. In some sense, Posner must try. For without this underlying assumption, the clock strikes midnight, the stately brougham of Chicago economic theory turns into a pumpkin, and the analytical horses that have pulled it so far over the past half- century turn back into little white mice.” “The litany of financial lunacy is longer than even the Eastern Orthodox litany of the saints.”
Roubini On the Failure To Predict Financial Failure, RGE Monitor, 1 Jun
An article and a 51 minute video delivered in a “wonky and academic and high brow” style. Roubini claims that the GFC was predictable, unlike some central bankers. Contributed by Bruce.
Holes In the China Recovery Story, Huffington Post, Michael J. Panzer, 3 Jun
Is the China recovery story all it’s cracked up to be? No. In another article “China’s government said unemployment is worsening, a quick rebound in trade is becoming less likely, and the nation is yet to feel the full effects of a global slump”.
China To Increase Subsidy For Auto, Home Appliance Replacements, China View, 19 May
“China will increase subsidies for consumers who sell their cars and home appliances in order to purchase new ones, in an effort to spur domestic consumption.” When China pumps up domestic consumption the money is used to buy Chinese goods. Lucky for China. When Australia pumps up domestic consumption the money is used to buy Chinese goods. Lucky for China.
Bernanke Sees End of Recession Soon, Yahoo Finance, 3 Jun
“In testimony to Congress, Bernanke sounded more confident that the U.S. recession would end this year than he had just one month ago, and he said the risk of a dangerous downward spiral in prices had receded.” It’s a shame there are no Chinese students in Congress. Does the end of the recession imply that there will be less than one in nine Americans on food stamps?
Fiscal Options For the UK, Willem Buiter, FT, 2 Jun
Long, academic article featuring the impact of long-running deficits on the solvency of the UK. Buiter fears that using inflation to remain solvent is a possibility. Contributed by Greg.
Ukraine Economy Down 21 Percent In Q1, Boston.com, 4 Jun
“The legislature’s Audit Chamber said such a severe economic downturn calls for amending this year’s budget, which is based on a government forecast of 0.4 percent growth.” So they were close enough I guess. The International Monetary Fund forecasts an 8 percent contraction for the entire year. Contributed by ak.
The States vs Federal Schism, Zero Hedge, 4 Jun
“By now if you don’t know the trajectory that the federal government has set on with monetizing virtually anything and everything, you must be living somewhere deep in the green shoot forest with only enough WiFi/cable coverage to get CNBC.” ”The report confirms all fears about just how gruesome the fiscal catastrophe is at the state level.”
GEOPOLITICAL:
Geithner Tells China Its Dollar Assets Are Safe, Reuters, 1 Jun
Zeitgeist watch. Geithner’s ridiculous comment drew loud laughter from the student audience. It’s the 20 year anniversary of the Tiananmen Square massacre too… looks like the students have selected a State-sanctioned target this time, rather than the State itself. Shame no one threw a shoe at him. Speaking of opposing the State, Bloomberg originally reported this story but later pulled it. Click here to watch a very frank discussion on China, US treasuries and the USD (note the hosts trying to close down controversial debate).
Latvian Debt Crisis Shakes Eastern Europe, Telegraph (UK), 3 Jun
“Latvia has become the first EU country to face a sovereign debt crisis after failing to sell a single bill at a treasury auction worth $100m (£61m), prompting fears of a fresh storm in Eastern Europe as capital flight tests currency pegs.” Looks like a repeat of the 1997 crisis in SE Asia. Soon it will be time for the big money to come in and pick up the pieces at pennies on the dollar – standard operating procedure after they’ve stacked the country with debt and shorted the currency. More from Zero Hedge (check out the graph!).
Lessons From Ecuador’s Bond Default, Felix Salman, 29 May
A small nation beats the kleptocracy for once.
Getting Real About Gold, The Australian, 3 Jun
“America’s third largest life insurer, Northwestern Mutual Life Insurance, has been in existence for 152 years. It has never in all those years bought gold — until now.” Good news for the gold bugs who, among other things, believe that central banks are manipulating gold downwards to encourage continued faith in fiat currencies.
Merkel Lashes Out at Central Banks, BusinessWeek,
Trouble within the ranks of the elite. “What other central banks have been doing must stop now. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe.” Off-the-radar parts of the blogosphere have long talked about the divisions between the Anglo Saxon countries on the one hand and the central Eurozone, China and Russia on the other. Contributed by Christopher.
