"The Houdini Recovery"

Gross domestic product grew at a 5.7 percent annual rate from October through December, more than anticipated and the strongest performance since the third quarter of 2003, figures from the Commerce Department Friday showed. But the amazing recovery in the U.S economic activity might also be the greatest illusion ever, and makes David Copperfield look like an amateur.

“It is hard to believe that productivity at this time is growing at a pace that is four times the historical norm.”

David Rosenberg

Consumer spending rose at a 2 percent pace after increasing 2.8 percent the previous three months, reflecting a slowdown in auto sales, Bloomberg News reports. Excluding autos, consumer spending increased at a 3 percent rate last quarter, the most in three years, indicating the biggest part of the economy was gaining speed.

“The increase is being fueled by growing incomes rather than a decrease in savings, signaling household purchases can keep expanding in coming months.”

Obviously, there are several ways to look av the GDP numbers. Here’s what chief economist David Rosenberg at Gluskin Sheff sees:

“First, the report was dominated by a huge inventory adjustment — not the onset of a new inventory cycle, but a transitory realignment of stocks to sales. Excluding the inventory contribution, GDP would have advanced at a much more tepid 2.2% QoQ annual rate, not really that much better than the soft 1.5% reading in the third quarter.”

“Second, it was a tad strange to have had inventories contribute half to the GDP tally, and at the same time see import growth cut in half last quarter. Normally, inventory adds are at least partly fuelled by purchases of foreign-made inputs. Not this time. Strip out inventories and the foreign trade sector, we see that domestic demand growth in the fourth quarter actually slowed to a paltry 1.7% annual rate from 2.3% in the third quarter.”

Recovery? What recovery?

Based on the economic simulations, demand growth with all the massive doses of fiscal and monetary stimulus should already be running in excess of a 10% annual rate.

So, the really interesting question is why it is that underlying demand conditions are still so benign more than two years after the greatest stimulus of all time.

“The answer is that this epic credit collapse is a pervasive drain on spending and very likely has another five years to play out”, David Rosenberg at Gluskin Sheff writes in a note to his clients.

“If you believe the GDP data — remember, there are more revisions to come — then you de facto must be of the view that productivity growth is soaring at over a 6% annual rate. No doubt productivity is rising — just look at the never-ending slate of layoff announcements. But we came off a cycle with no technological advance and no capital deepening, so it is hard to believe that productivity at this time is growing at a pace that is four times the historical norm. Sorry, but we’re not buyers of that view.”

“No matter how you slice it, the GDP numbers represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker — a few grains won’t do.”

Here’s the full commentary from Mr. Rosenberg.

And here’s the other side of the coin – presented by Bloomberg News.

If you want to study the numbers for yourself, here’s the release from the U.S. authorities.



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