What is unexpected is just how strong the overall economy remains in spite of the huge losses being incurred in that part of the economy. It reminds me of the late 1980's when "rolling recessions" across the rust belt, then the financial industry, and finally the energy belt failed to KO the broad economic recovery that began in 1983. It wasn't until the junk bond and S&L crisis hit that the economy finally slowed to a crawl.
Last week's economic numbers suggest that the real estate bust is just another rolling recession that severely impacts one part of the economy without resulting in an nationwide slowdown. Growth in GDP (gross domestic production) and payrolls both suggest solid economic growth, even in spite of the blow-up in the housing sector.
Moreover, I wouldn't want today's comments to take away from the fact that I have been surprised by just how strong this economy remains. However, I think it might be a little less strong than last week's numbers suggest.
In "Pillow Talk," Barron's columnist Alan Abelson points out that last week's 3.9% 3Q GDP number was, shall we say, "enhanced" by the fact that according to this initial estimate of GDP, the GDP inflator rose only 0.8%, versus a 2.6% increase in the first quarter. To most of us, it seems that inflationary pressures are getting worse. However, since the GDP deflator barely increased according to the most recent calculation, the headline GDP number soared 3.9%, instead of a more modest 3% increase. "Save for the miraculous decline in the GDP 'deflator,' in the third quarter," Abelson writes, "growth in the economy would have barely topped 3%. So maybe this 3Q number is a tad bit aggressive, unless you actually believe in the 0.8% inflation number. I don't.
Similarly, the +166,000 job increase was helped a bit by the government's birth/death adjustment, which accounted for about 2/3 of the increase. Abelson write, "which means, pure and simple, they were the product of somebody's computer doodling; they were, in other words, made-out-of-the-whole-cloth phantom, phony."
So...is there a surprising amount of strength in this economy, particularly given the horrific state of the residential real estate industry? Yes. But, is it as good as this market seems to be thinking? I doubt it.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
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