GDP-US and China

My excuses for no posts for nearly a month: too much work, poor internet speeds and really sheer indolence!!! So, fourth quarter GDP figures for the US was “better” than expected: -3.8% vs -5% consensus. So started cheering yet? Maybe AK and other Dr Doom’s are wrong and the doomsayers must be dismissed right? Unfortunately, the devil is in the details. Consumer spending fell 3.5%, non-residential investment 19.1%, residential fell 23.6%. All this means that real final sales, the barometer I really watch, fell 4.9%. If that doesn’t shock you, it should. I certainly was, and it was worse than most expected. Final retail sales are important because they are the final measures of domestic demand. Such nos. portend a lot more pain ahead. Indeed, back when Q1 GDP nos. for 2008 came in, people were celebrating. When I told my professor that it was poor since retail sales fell for the first time, I was pooh-poohed (unfortunately didn’t blog at the time). People at the company I interned in where sure that a soft landing was the base case. I insisted a severe recession would follow and we were already in it then. The first tax rebates skewed Q2, and Q3 showed people the real damage. Then, Lehman (which also I consistently predicted) collapsed and the rest is history.
So, predictions for Q1 2009? Before this no. I thought 3.5%. Now maybe 4-4.5%. Why? Because, all this abnormality was due to build up of inventory which added 1.6% to GDP. To cleanse this inventory we will see Q1 see a sharp drop and hence the further decline.
A note is in order here. These are QoQ figures annualized. Hence a small error in QoQ can translated into a factor of 4 in error. Thus, if the nos. turn out to be 3.8 vs 4.2% an error of 0.1% is the real error in prediction which really is not bad. The one no. truly puzzling is the trade data which added 0.1%.
Finally, GDP in china at 6.8% is YoY figure. There are two issues in interpretation here. First, one doesn’t know the true data given China’s propensity to massage the nos. It could be to portray a rebound, or on the contrary it may be a way to prepare for future shocking nos. I believe it’s the latter. Which brings me to the second issue: YoY is misleading. QoQ figures based on the above nos. would indicate negative quarter growth!!!! If that didn’t shock you, it should. I believe that QoQ in Q1 2009 will indicate a second contraction, and viewed in this light, we can call China to be in a recession.