For a long time now, we have seen outsized revisions of government data, including the first quarter 2014 GDP figures, which the government initially reported at 0.1% annualized growth, only to revise that number down dramatically to -2.9% annualized growth. Today, the government reported that second quarter GDP grew at a 4% annualized rate, and they (once again) revised first quarter GDP growth to -2.1% annualized growth. Further, they have (once again) changed the formula used to calculate GDP growth, going back three years, revising all data for every quarter in that three-year period. This constant manipulation of data only serves to fuel the now frothy stock market, as investors, forced into stocks by the Fed’s insistence on maintaining near zero short-term interest rates, have no other choice but to buy stocks if they want any kind of real return after inflation.
Even with the revision of the formula, I am willing to bet that the current GDP growth reading of 4% for the second quarter of 2014 will be revised significantly over the coming two months, as we receive the second report in August, and then the final revision in September. They can manipulate the formula, but they cannot change reality.
The very poor GDP growth number, even after their revision (read manipulation) from -2.9% to -2.1%, was blamed on bad weather early in the first quarter. It will be very interesting to see what excuse is used when second quarter GDP revisions reveal that the economy did not grow at 4% as initially reported.
We need only look at corporate revenues (not earnings) to see that the economy is sluggish at best. Growth in employment, while it has been steadily improving, is still averaging around 200,000 per month. A health recovery should show at least 500,000 jobs added per month on a sustained basis. Even with the employment growth we have witnessed, consumers are simply not spending money. The most recent GDP report did show consumer spending increasing at a 2.5% annualized rate, as compared with only 1.2% during the first quarter of 2014. However, the largest component of this growth was in autos and other durable goods (like washing machines, refrigerators, etc.)
At the same time we are receiving this data from the government, we are getting reports of thousands of unsold cars and trucks sitting on abandoned airport strips, parking lots, shipping storage areas, and the like. It is not clear as of yet if these reports are accurate, and if true, what impact this will have on future auto sales, but what is clear is that consumers have been unwilling to spend, even as the stock market has driven-up household wealth dramatically over the past 5+ years. In fact, incomes were largely driven by stock market increases, which had a significant impact on the GDP growth revisions (the change in the formula) the government just completed.
The Fed is meeting now, and it will be interesting to see how this latest data affects their policies regarding interest rates going forward. Inflation jumped from 1.2% to 2% in this latest GDP report, which is at the bottom of the threshold for the Fed (they want inflation to be between 2% and 2.5%, no higher). The Fed should reduce their bond purchases by another $10 billion at this meeting, bringing the total down to $25 billion per month. They may also reference their reinvestment policy – the reinvestment of bonds as they mature in the Fed’s $4 trillion balance sheet. A reduction of end of the reinvestment of maturing assets could be more impactful on the economy than the reduction of the bond purchasing program.
Small cap stocks and high yield (junk) bonds have already begun their corrections. The broader market has struggled to continue to make new highs (the S&P 500 has made 27 new, all-time highs so far in 2014). Even today’s stronger than expected GDP report, although initially pushing stocks higher, was unable to keep the party rolling, with the Dow now negative for the day (at least as of this writing). As we head towards the historically significant September/October time-period, a time when stocks have had major corrections and crashes (1929, 1987, 2008), it will be interesting to see how investors process the data from the government, the actions of the Fed, and the realities of the extended valuations for stocks that by any measure scream for a correction.