"Kee" Points with Jim Kee, Ph.D.

Markets pushed upwards towards pre 2007-09 crisis highs last week following decent, though not great, economic numbers. Employers added 157,000 jobs in January, below a more normal 200K, but consistent with continuing expansion. Manufacturing data showed a pick up as well.

 

Negative fourth quarter GDP! Indeed, the market seemed to largely dismiss last week’s big headline event, which was the Bureau of Economic Analysis' (BEA) Advance Estimate of GDP for the 4th quarter of 2012. GDP contracted -.1 percent, which was below consensus of 1 to 1.3 percent and below my own bold “probably low but positive” expectation. Of course, there will be subsequent revisions to the number as more data comes in, and most analysts expect the number to be revised upwards. Kee Points readers know that you can't predict one quarter’s GDP growth based on the previous quarter's numbers. As an obvious example,  the 3rd quarter 2012 GDP number has been revised upwards to 3.1 percent, which was hardly predictive of the latest -.1 percent number that followed! Looking at the 4th quarter number illustrates why GDP is so hard to predict, it's worth explaining further.

 

A big driver of the -.1 percent fourth quarter number was a decline in “inventory investment,” meaning businesses sold goods but didn’t replace them or rebuild their inventories. I think a lot of this decline in inventory investment reflects the “wait and see” posture taken by businesses who were uncertain about end-of-year events like the November elections and the January fiscal cliff. In other words, I think it reflects temporary fence-sitting, and so do the markets. Another big negative was a sharp decline in defense spending, that the BEA reported as a 22.2 percent annualized decline (BEA), which exaggerates the 5.3 percent decline in the quarterly number (Barron’s). The third contributor was a decrease in exports, no doubt reflecting the global downturn that probably bottomed around the third quarter of 2012. Most analysts feel that these negative drivers were either one-shot events (Action Economics) and/or corrections from third quarter “overshoots” in the same categories. Broader categories such as personal consumption expenditures were much stronger (2.2 percent).

 

Therein lies the point: Changes in quarterly GDP numbers and broader trends are caused by small and large (and largely unforeseen) “shocks” that are not evident in prior data. So all of the econometric “time series analysis” and curve fitting is of little value in forecasting turning points in the data. That’s why after over 40 years of sophisticated, computer-aided modeling, forecasting GDP is still as much an art as a science.

 

All in all, real GDP in the U.S. increased 2.2 percent for 2012, which is up from 1.8 percent in 2011. For reasons I discussed in our webcast and during our client updates, I feel that there is a good chance of stronger growth in the 2.5-3 percent range for 2013, particularly towards the second half of the year. 

 

I would also like to congratulate our Chief Operating Officer and Executive Vice President, Teri Grubb on her Shining Star award from the San Antonio Business Journal. Both she and our Chief Compliance Officer, General Counsel and Executive Vice President, Christina Markell-Balleza were recently named to the San Antonio Business Journal's "Top 40 Under 40."  Click here to read the article in the San Antonio Business Journal recognizing Teri Grubb as the 2012 Shining Star.