GDP revision to -2.9% was a shock

Outlook

The GDP revision to -2.9% was a shock, if a short-lived one, and analysts have long spoken of the splendid Q2 recovery. Yesterday Macroeconomic Advisers issued a forecast of 3.5% for Q2. We don’t claim to understand Commerce Dept statistical methods, but it seem obvious that it’s stu-pid to combine hospital and doctor office earnings under the heading “consumer spending” when it’s insurance compa-nies that do the bulk of that spending. Did consumers really contract spending on healthcare by 1.7%? Of course not. If the consumer spending portion of the GDP number is bunk, the entire GDP number is bunk. All the other data points to less of a contraction, especially job growth. Besides, a revision from +3.1% to -1.7% is not credible on the face of it.

Just about everybody is willing to let it go—it’s backward-looking, it’s a fluke, conditions are obviously not that bad—but we say we shouldn’t let it go. The “shock” is not the bad number but rather a change in methodology at the Com-merce Dept that has far-reaching effects. Who, exactly, makes a decision like this? We are increasingly dismayed by the federal government’s low data-management and computer skills. The Veterans Administration lies half-dead under a mountain of paper, and not metaphorical paper but the real stuff, from trees. The IRS can’t find e-mails and keeps tapes only 6 months when the rest of us have to keep paper, all the paper, for 7 years. It’s seriously inadequate and makes one long for Ross Perot. We blame the Reagan/Bush attitude that “government is the problem,” so let’s prove it by allowing government administration to be incompetent. But the Dems failed to fix it. A pox on both their houses. This is another nail in the coffin of confidence in the US and a contributor to the anti-dollar bias. Not only does the US fail to balance trade and balance the budget, it can’t even count straight.

Today we get the usual Thursday jobless claims and personal income and spending. The accompanying PCE deflator will be the main event, expected up at 1.8% from 1.6%. This is not yet to the Fed’s 2% target but the direction points to the Fed about to have a hard time saying evidence of inflation is, so far, “noise.” But any tendency to push yields higher on inflation scare stories, justified or not, runs smack into the geopolitical hurdle. Demand for Treasuries will remain firm and support prices for the foreseeable future. And let’s not forget that tomorrow, we will start fretting about next week’s payrolls, probably another print of 200,000 or more. Bottom line, it looks like the US has good growth and rising inflation, which normally means higher interest rates down the road and not too far down the road, either—except this time, the Fed is adamantly dovish, so maybe not. That means the conventional wisdom—buy the yield-advantaged cur-rencies—will be working full speed ahead—NZD, AUD, maybe the CAD, and GBP. There’s a smell of snatching defeat from the jaws of victory about the FX market today.