Mish's Global Economic Trend Analysis

GDP Projections Drop Yet Again, Still Too High
Durable Goods Orders Unexpectedly Decline, Business Spending Declines 6th Month
One Minute to Midnight: Athens Raids Public Health Coffers in Hunt for Cash; Brussels Threatens Capital Controls

GDP Projections Drop Yet Again, Still Too High

Posted: 25 Mar 2015 03:38 PM PDT

In the wake of a 6th consecutive decline in business spending GDP Growth Estimates Tumble, Again.

The Federal Reserve Bank of Atlanta on Wednesday put its gauge at 0.2%, down from its earlier estimate of 0.3%.
Morgan Stanley economists lowered their estimate for first-quarter growth to an annualized 0.9% from an earlier forecast of 1.2%, pointing to light inventories and lower capital goods exports as weighing on GDP.
Economists at Barclays lowered their projection a tenth of a percentage point to 1.2%.
The forecasting firm Macroeconomic Advisers also trimmed its estimate down to 1.2% from 1.5% before Wednesday. Barclays and Macroeconomic Advisers cited, among other factors, worries that the drop in shipments last month foretells a decline in first-quarter equipment investment.
J.P. Morgan Chase economists lowered their first-quarter forecast to an annualized 1.5%, from 2%, saying a decline in investment by oil companies — the result of the plunge in oil prices — could offset the lift from higher consumer spending.

Optimism Still Rules

Optimism is still the order of the day.

"Overall, given the usual noise in the data, as well as a melange of other special factors, we do not view the 1.5% [First-quarter] tracking as so far below the 2.4% average of the current expansion to raise more serious worries," said J.P. Morgan chief U.S. economist Michael Feroli in a note to clients.

Speaking of optimism, Goldman Trims U.S. First Quarter GDP View to 1.8 Percent from 2.0 Percent.

"Goldman Sachs economist Kris Dawson said on Wednesday he scaled back his view of U.S. growth in the first quarter, following an unexpectedly weak report on domestic durable goods orders in February."

Core Business Orders

Today we learned core business spending, defined as new nondefense capital goods orders excluding aircraft, declined for the sixth month.

Core business spending declined seven months at the beginning of 2012, but nearly all data other than jobs growth has been weak this go around.

The series is somewhat volatile as the following chart shows.

GDP Now Forecast Declines Again

Once again, let's tune into the GDPNow Forecast of the Atlanta Fed.

GDPNow History

The initial forecast on February 2, was 1.9% annualized growth. It is now 0.2% annualized growth. That's quite the plunge in less than two months.

Ominous Trends

I was way ahead of this game. On January 31, I wrote Diving Into the GDP Report - Some Ominous Trends - Yellen Yap - Decoupling or Not?

On Thursday, Fed Chair Janet Yellen met with Senate Democrats at a private luncheon. She told the Democrats that the U.S. Economy is Strong.

[I commented ...]

Several PCE [Personal Consumption Expenditures] items stand out. Is the 2.87% increase sustainable?

Curiously, gasoline added 0.25 percentage points to GDP in spite of rapidly falling prices.

Motor vehicles and parts show rapidly slowing growth since second quarter. That's a trend I expect to continue.

I discussed autos on January 6 in Economists Upbeat Despite 4th Consecutive Decline in Factory Orders; Auto Orders vs. Expectations.

Autos are slowing and so will auto-related jobs. Yet economists believe "Auto sales are expected to reach their highest level in a decade this year, bolstered by strong job gains and cheap gas."

My take: Autos will soon subtract from GDP.

Growth in fixed investment is falling rapidly. Equipment, industrial equipment, and transportation equipment are already in contraction.

Inventories added 0.82 percentage points to fourth quarter GDP. Over time, this series trends to zero, so expect a pull back next quarter.

Rising imports subtract from GDP. Imports actually took 1.39 percentage points from GDP. If oil prices head back up, even modestly, this number could get worse.

Exports added 0.37 percentage points to fourth quarter GDP. But note the trend.

Because of the rising US dollar, export growth is dwindling. Will exports add or subtract to GDP next quarter?

All things considered, this GDP report is far more than a simple snapback from the rapid expansion last quarter.

Canada in Recession, US Will Follow in 2015

Earlier today in Canada in Recession, US Will Follow in 2015, I stated "A Canadian recession is underway. US will follow."

Decoupling or Not?

I remain amused by all the pundits who think the US has "decoupled" from the global economy and will grow stronger in 2015.

Let's return to a question I asked above: Will exports add or subtract to GDP next quarter?

I suggest the answer is subtract. Not only are US exports getting more expensive relative to Europe and Japan, the entire rest of the global economy is slowing rapidly. Our biggest trading partner is Canada and Canada is in recession, with a rapidly sinking loonie (Canadian dollar) on top of it.

US Recession

The US won't decouple, just as China did not decouple from the global economy in 2008-2009 (a widely-held thesis I also knocked at the time).

Indeed, now that virtually no economist expects a US recession, I believe we are finally on the cusp of one, just as the Fed seems committed to hike

Much of this seemed pretty obvious back in January. I suppose it's not obvious because economists still don't see it.

Then again, economists have a perfect track record. They have never once in history predicted a recession.

For a full recap of today's disastrous durable goods report, please see Durable Goods Orders Unexpectedly Decline, Business Spending Declines 6th Month.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Durable Goods Orders Unexpectedly Decline, Business Spending Declines 6th Month

Posted: 25 Mar 2015 12:55 PM PDT

The durable goods report for February was released today. It was another disaster in a long line of weak economic reports. And once again economists missed their optimistic estimates by a mile.

Apparently the weather has been bad for six straight months because this is the sixth consecutive decline in overall business spending.

The Bloomberg Consensus Estimate was for a 0.7% rise. The actual number was a 1.4% decline.

Durables orders fell 1.4 percent in February after rebounding 2.0 percent the month before. Market expectations were for a 0.7 percent gain.

Excluding transportation, the core declined 0.4 percent, following a 0.7 percent drop in January. Analysts projected a 0.3 percent gain in February.

With those estimates in hand, let's dive into the Commerce Report on durable goods.

Durable Goods Synopsis

New Orders. New orders for manufactured durable goods in February decreased $3.2 billion or 1.4 percent to $231.3 billion, the U.S. Census Bureau announced today. This decrease, down three of the last four months, followed a 2.0 percent January increase. Excluding transportation, new orders decreased 0.4 percent [the fifth straight decline]. Excluding defense, new orders decreased 1.0 percent. Transportation equipment, also down three of the last four months, led the decrease, $2.5 billion or 3.5 percent to $69.5 billion. [Orders for nondefense capital goods excluding aircraft dropped 1.4% from January. That marked the sixth straight monthly decline. This is the business spending component for machinery, computers, etc.]

Shipments. Shipments of manufactured durable goods in February, down four of the last five months, decreased $0.5 billion or 0.2 percent to $244.0 billion. This followed a 1.4 percent January decrease. Primary metals, down five consecutive months, led the decrease, $0.3 billion or 1.1 percent to $26.1 billion.

Unfilled Orders. Unfilled orders for manufactured durable goods in February, down three consecutive months, decreased $5.6 billion or 0.5 percent to $1,156.9 billion. This followed a 0.3 percent January decrease. Transportation equipment, also down three consecutive months, led the decrease, $4.6 billion or 0.6 percent to $731.6 billion.

Inventories. Inventories of manufactured durable goods in February, up twenty-two of the last twenty-three months, increased $1.1 billion or 0.3 percent to $413.0 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.3 percent January increase. Transportation equipment, also up twenty-two of the last twenty-three months, drove the increase, $1.2 billion or 0.9 percent to $135.4 billion.

Capital Goods. Nondefense new orders for capital goods in February decreased $2.1 billion or 2.6 percent to $77.3 billion. Shipments decreased slightly to $80.2 billion. Unfilled orders decreased $2.9 billion or 0.4 percent to $727.8 billion. Inventories increased $0.3 billion or 0.1 percent to $186.8 billion. Defense new orders for capital goods in February increased $0.8 billion or 10.2 percent to $8.3 billion. Shipments decreased $0.1 billion or 0.8 percent to $9.0 billion. Unfilled orders decreased $0.7 billion.

Item	Feb	Jan	Dec	Jan-Feb %Chg	Dec-Jan % Chg	Nov-Dec % Chg
Total New Orders	231,291	234,462	229,827	-1.4	2.0	-3.7
Ex-Transportation Orders	161,807	162,453	163,651	-0.4	-0.7	-0.8
Ex-Defense Orders	222,596	224,795	219,755	-1.0	2.3	-3.2
Transportation Orders	69,484	72,009	66,176	-35	8.8	-10.0
Capital Goods Orders	86,650	86,933	81,003	-1.5	7.3	-10.3
Non-Defense Capital Goods Orders	77,324	79,377	72,990	-2.6	8.8	-10.1
Defense Capital Goods Orders	8,326	7,556	8,013	10.2	-5.7	-11.8
Core Capital Goods Orders	69,250	70,225	70,308	-1.4	-0.1	-0.5
Core Capital Goods Shipments	70,044	69,909	70,212	0.2	-0.4	0.4

Line items (except the last line which shows shipments) are new orders, in millions of dollars, seasonally adjusted. Core capital goods exclude defense and aircraft.

Once again this was another exceptionally weak economic report, and once again economists were not close to the mark.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

One Minute to Midnight: Athens Raids Public Health Coffers in Hunt for Cash; Brussels Threatens Capital Controls

Posted: 25 Mar 2015 03:30 AM PDT

Eurozone watchers have said 11th hour so many times that no one believes it any more. To place new emphasis on the plight of Greece it's now allegedly 1 minute to midnight.

Given that Greek funds were supposed to last until April 30, there's plenty of time for 30 seconds to midnight, 20 seconds to midnight, then a countdown to Cinderella hour when Greece may finally turn into a pumpkin.

Brussels Threatens Capital Controls

Meanwhile, with a countdown underway, please consider Athens Raids Public Health Coffers in Hunt for Cash.

Greece's government has raided the coffers of its public health service and the Athens metro as it widens a hunt for funds to keep itself afloat and service debts.

Athens faces a €1.7bn bill for wages and pensions at the end of the month and then a €450m loan payment to the International Monetary Fund on April 9. Greek government and eurozone officials believe Athens does not have funds to cover both.

In another constraint on Greece's ability to raise cash, the European Central Bank decided to impose stricter curbs on the issuance of short-term government debt.

EU officials expressed hope that a marathon Monday night meeting between Alexis Tsipras, the Greek prime minister, and his German counterpart, chancellor Angela Merkel, would spark long-stalled talks over economic reforms Greece must implement to unlock €7.2bn in frozen bailout aid.

In the absence of progress, some EU officials were accelerating their preparations in case Athens runs out of cash before it agrees a reform programme. In Brussels, European Commission officials have begun looking again at EU law governing capital controls in case the growing uncertainty, or a non-payment to the IMF, spurs a renewed run on bank deposits.

In Frankfurt, the ECB informed Greece's biggest banks that it was making legally binding the ceiling it imposed last month on their holdings of short-term Treasury bills.

Such a move will limit the Eurosystem's exposure to the Greek government should it fail to pay its debts. But it will also close off another source of financing on which Athens had been relying.

Greek banks hold about €11bn in Greek T-bills, and Athens must roll over two T-bills totalling €2.4bn in mid-April.

"The Greeks are one minute away from midnight," said Mujtaba Rahman, head of European analysis at the Eurasia Group consultancy. "The government is at the edge of the precipice and may well go over.

In a sign that the cash crunch has become more desperate, officials at Greece's state healthcare service, were asked on Tuesday to hand over a €50m reserve for paying arrears owed to medical workers.

Earlier this month about €150m of budget funding for hospital supplies was unexpectedly withheld, according to health ministry officials.

The government has so far rounded up more than €600m of cash held by state-owned corporations, including contributions from the Athens metro company, the state electricity supplier, PPC, and the Athens water utility.

About €300m in EU subsidies due to farmers has been diverted to cover salary payments to civil servants, according to people briefed on how the cash crunch is being handled.

Some officials believe a failure to pay the IMF in April would not be catastrophic: under fund rules, a non-payment is not immediately considered a default, though it would prevent Greece from accessing any IMF bailout funding. Half of the €7.2bn tranche Athens is seeking comes from the fund.

A failure to pay either of the T-bills — one is due on April 14, the next on April 17 — would probably bring wider upheaval since they could trigger clauses in other debt obligations that would make them due immediately.

The ECB ceiling could make repayment of the April 14 bill particularly challenging. Greek banks have been the primary buyers of such debt and have essentially rolled over their existing holdings during recent T-bill auctions. But at least 20 per cent of the April 14 bill is held by investors outside Greece who are unlikely to roll over their holdings and Greek banks are now barred from buying up the difference.

Seven Seconds to Midnight?

With all these funds being diverted, I fail to see how Greece can possibly make it to April 30.

Thus I offer my own number. I believe it's seven seconds to midnight. However, we have seen the clock stop on many occasions before, stuck on the 11th hour for weeks on end.

It could easily stop at one second to midnight for a week or so.

With that, it's time for a musical tribute.

Link if video does not play: Does Anybody Really Knows What Time It Is? - Chicago

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Wednesday, March 25, 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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