A Tale of Two Economies...

GDP Forecast: UGH!

The People Who Nailed The Horrific Q1 GDP Number Have Bad News About Q2 

The Atlanta Fed nailed US gross domestic product in the first quarter.

On Wednesday, we learned that the US economy grew by just 0.2%, far below the consensus forecast among economists for 1% growth. Of the 86 economists surveyed by Bloomberg, only four estimated that GDP growth would be 0.2% or lower.

The Atlanta Fed had long forecast 0.2% growth before revising it down to 0.1% after last Friday's durable goods report.

And just a day after the disappointing Q1 GDP release, the Atlanta Fed has news about Q2: the economy will grow by just 0.9%, according to their latest forecast. Here's what they wrote in a post on their website:

"The initial GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2015 was 0.9 percent on April 30. 

Real GDP grew 0.2 percent in the first quarter, according to the "advance" estimate from the U.S. Bureau of Economic Analysis, 0.1 percentage point higher than the GDPNow model nowcast."

Economists noted that the winter weather, West Coast port strikes, and lower energy prices slowed down the economy — all temporary factors.

Still, for a sense of how gloomy the Atlanta Fed's forecast is, Bank of America Merrill Lynch is forecasting 3.5% growth. Goldman Sachs is forecasting 3.0% growth.

Upward Sloping Treasury Yield Curve is a Bullish Omen for the Stock Market & the U.S. Economy

Recessions rarely occur when the yield curve is sloping upward.

Under President Obama, This Anemic Economic Recovery Has Been Well Below Average...

The U.S. Economy Grows Only 2% in The 3rd Quarter

2nd Quarter GDP Growth An Anemic 1.3% & Durable Goods Orders Plunge -13.2%...

Economic Growth Slows for the 2nd Consecutive Quarter to Only 1.5%...

Persistent Uptrend in Industrial Production Bodes Well for U.S. Economy...

1st Quarter U.S. GDP Revised Downward To A Meager +1.9%...

Quote of The Day: Recession On The Horizon?...

“When underlying growth slows to this degree, a recession always follows. Basically, growth has flatlined."

Lakshman Achuthan, co-founder of the Economic Cycle Research Institute

Quote of The Day: Japan-Like Economic Growth Ahead?

“It's pretty amazing that the Fed will (keep rates) exceptionally low until 2013,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “They are telling you that we are in a stage of Japanese-like economic growth.”

U.S. Real GDP Now Above Pre-Recession Levels!!!

WSJ -- "U.S. economic output finally regained the level reached before the recession, as growth sped up on stronger consumer spending and exports (see chart above).  

Gross domestic product (GDP)—a broad measure of all goods and services produced—grew at a +3.2% annual rate in the fourth quarter. That's up from the +2.6% pace notched the quarter before and confirms the view held by many economists and stock-market investors that the economy is gaining enough momentum to start bringing down unemployment in the months ahead.

The expansion in large part was fueled by a jump in consumer spending—a crucial change from earlier in the recovery, when growth relied heavily on businesses investing and building up inventories.

Final sales—a measure that gives a feeling for underlying demand in the economy by subtracting the change in business inventories from GDP—notched its biggest increase since 1984, growing +7.1% in the fourth quarter. This reviving demand bodes well for 2011, because businesses could take it as a signal to stock their shelves and hire workers."

Why It Doesn't Feel Like a Recovery - An Interactive Slideshow...

An exceptional interactive graphic/slideshow of the economy's output gap....

Click here:
Why It Doesn't Feel Like a Recovery 

Bottom Line: 

It will take average annual economic growth of +3% per year until 2020 for unemployment rate to fall to 5% of the labor force, from roughly 9.5% at present. 

But if the economy rises only +2% per year, the unemployment rate will increase to 11.9% in 2020.

Faith in Government Low...

Steen Jakobsen, Chief Investment Officer at Litmus Capital Partners, says a big risk for markets is the fact that faith in the U.S. government's ability to fight the economic markets, as well as in central banks' monetary policy tools, is eroding.

"The fact of the matter is that people have a huge disbelief in government," he said.  "The real crisis 2.0 is not about the new normal or whatever term is being used, the new crisis is a crisis of faith in the U.S. system. We're far away from that point now but that is a clear risk," Jakobsen said. 

Because people are losing faith in the governments' ability to bring the economy back on track, the impact of various policies is smaller, while keeping interest rates at record lows has altered investors' perception about what this actually means for the market, Jakobsen warned.

Investors no longer perceive low rates as good for stock markets because they create liquidity, but as a sign that a slowdown in economic growth is coming, he said. 

Jakobsen predicts zero or even negative growth for the US economy for the third and fourth quarters.

Bleak Outlook for 2011

According to an Associated Press (AP) survey of leading economists, the U.S. economic recovery will remain slow deep into next year, held back by shoppers reluctant to spend and employers hesitant to hire.

The AP survey compiles forecasts of leading private, corporate and academic economists on a range of indicators, including employment, consumer spending and inflation.

Among their forecasts:  Economic growth the rest of this year and early next year will weaken, to less than 3%. From January through May, the economy grew at roughly a 3.5% pace; the unemployment rate will be no lower at the end of the year than it is now; 9.5%. 


A majority think it will be 2015 or later before the rate falls to a historically normal 5%. State budget shortfalls pose a "significant" or "severe" risk to the national economy. The loss of tax revenue has forced state and local governments to cut services and lay off workers. 

The economists have turned more pessimistic since the recovery hit turbulence in May. Europe's debt crisis sent tremors through Wall Street, causing stocks to tumble and raising doubts about the durability of the rebound.  Since then, businesses have been slow to step up hiring. Americans' confidence in the economy has declined, leading shoppers to reduce spending. And the housing market has weakened further with the end of a homebuyer tax credit that had buoyed sales earlier this year.  


Consumers aren't leading this rebound, as they usually do, despite ultra-low borrowing costs. Their spending growth will weaken in the second half of this year and strengthen only slightly next year, a majority of economists said. They think shoppers' reluctance to spend more money poses a "significant" or "severe" risk to the recovery.

"It seems like we hit an air pocket in consumer spending," said survey participant Richard DeKaser, president of Woodley Park Research.

Market Forecast - Ken Taubes @ Pioneer Investment Management

Executive Summary

We believe the U.S. economy will grow by 3% to 4% in 2010.

While consumption may remain muted in light of continued deleveraging among consumers, exports, inventories and fixed investment could experience strong gains. Robust emerging market growth and the weakened dollar, together with high levels of corporate profits, productivity and cash (relative to this stage of the economic recovery) should help bolster GDP growth.

Inflation may threaten if appropriate monetary and fiscal measures are not implemented during the next several years, but should remain dormant in the near term, given the ongoing deleveraging.

Finally, we believe the U.S. dollar may remain stable over the next year. Its declining value relative to currencies of countries with strong growth, current account surpluses and solid fiscal budgets may be offset by its potential to appreciate against the euro and the yen, whose countries face lower growth than the U.S. and have comparable, if not higher, levels of government debt/GDP.

Following record returns in 2009, credit markets should cede market leadership in 2010 to equities, which we believe offer more attractive relative value and should benefit from the global recovery and high corporate operating profits. Over the next several years, however, we continue to find credit markets attractive when compared to developed market government debt, the quality of which will decline as deficits mount. In addition, as the economy recovers, we foresee a cyclical rise in yields, which will favor fixed income credit.

We also believe investors, where appropriate, should talk to their advisors about the advisability of making a discrete allocation to inflation-sensitive products to protect themselves against potential long term inflation.

Ken Taubes
(c) Pioneer Investment Management
http://www.pioneerinvestments.com/

Ken Taubes is the Head of Portfolio Management U.S. and is a Portfolio Manager of Pioneer Investments’ U.S. Core and U.S. Core Plus strategies. He has over 25 years of investment experience, including more than 10 with Pioneer Investments, and is well known within the investment industry.

GDP Grows at Fastest Pace in 6 Years

While the ultimate pace of the economic rebound continues to be debated, GDP in the 4th quarter of 2009 rose +5.7% (expectations were for growth of +4.6%), which was the fastest pace in 6 years. Granted, this growth follows an even bigger decline of -6.4% in the first quarter of 2009, but at least it's a start.

Judging by the performance of equities in the fourth quarter, and the earnings reports we've seen so far, we already knew the fourth quarter was strong, the big question is whether or not this growth will continue in Q1.

Based on what we've seen so far in terms of guidance, companies seem to have a positive outlook.

Chart and analysis courtesy of Bespoke Investment Group

Q&A: Pimco's Mohamed El-Erian - Courtesy of Fortune Magazine

Pimco's CEO says individual investors must change their investing style, such as being less U.S.-centric.
By Geoff Colvin, senior editor at large

Pimco, the world's largest bond investor, has benefited from investors' flight to quality over the past two years and now manages about $1 trillion in assets.

Mohamed El-Erian, 51, is still thinking large and deep thoughts; his book, "When Markets Collide: Investment Strategies for the Age of Global Economic Change," won the Financial Times Goldman Sachs business book of the year award last year.

 
Mr. El- Erian sat down recently with Fortune's Geoff Colvin to talk about threats to individual investors, the best framework for an investment portfolio, how the 2008 financial meltdown was like a double-drive-through McDonald's, and much else.

 Here's a sampling of  some of the questions....

We've had one quarter of solid economic growth. Is the recession over?

Why are a lot of very positive things unlikely to occur for the consumer?

If American consumers start saving more, isn't that a good thing?

From the perspective of an individual investor, is the multipolar world a good thing or a bad thing?

What are the most important things that individual investors need to do differently?

What's the best protection for an individual investor against inflation?

In your book you present an asset allocation for a typical U.S. investor. Only 15% is in U.S. equities, which is much less than most U.S. investors hold. And only 14% is in bonds, U.S. and non-U.S., which seems like not very much. What's the logic?

You've said that this asset allocation -- which includes many other elements [see table] -- could be expected to return +5% to +7% a year in real terms over the long run. Many investors believe that U.S. equities will return much more over time. Is that just not correct?

A lot of new financial regulation is in the works. Is it going to be, as it so often is, regulation that will prevent the crisis that just happened and not regulation that will prevent the next crisis?

After the September 2008 crisis, you mentioned in Fortune that you'd asked your wife to withdraw cash from the bank. What was your life like?

What's your bottom line advice to individual investors in today's environment?

Full Interview - Click Here: Investing Advice from Mohamed El-Erian: Q&A with Fortune - Dec. 10, 2009