Real GDI Provides Strong Recession Warning

Yesterday the BEA released its Third Estimate for Second Quarter GDP.

The third (final) estimate bumped up the prior estimate from 1.1% to 1.4%. The BEA changed the name from final to third because GDP is subject to revisions years or even decades later.

Diving into the report we see “Real Gross Domestic Income ” GDI went from +0.2% to -0.2%. Is that significant? Let’s take a look.

Third Estimate of Second Quarter GDP


DI and GDP are two measures of the same thing. Over time they equal. Since the data sources are different, they frequently diverge for a while.

Business Insider has a nice article that explains the difference: FORGET GDP: Here’s the new way Wall Street is measuring the US economy.

Note: The following snips are from May 30, 2015. The generalities are correct, the assessments as to what are happening now are incorrect.

The basic difference between the two is that GDP measures what the economy produces — goods, services, technology, intellectual property — while GDI measures what the economy makes, tracking things like wages, profits, and taxes.

Why GDI?

There are actual, substantive reasons for economists and market participants to focus on GDI rather than the traditional GDP number. In theory, the two numbers should be the same, as both are designed to measure the aggregate growth of the economy. GDP measures what the economy produces, GDI measures what it takes in.

But because they use different data sources, these readings are subject to measurement error, though the BEA notes they tend to follow similar paths over time.

A main difference in their inputs is tax receipts, with GDI taking into account taxes on production and imports, as well as subsidies, net interest, and miscellaneous payments.

Since the financial crisis, first-quarter GDP has consistently lagged growth during the second, third, and fourth quarters. And the whole point of the government “seasonally adjusting” the data is to smooth out these variances and give markets and the public a more reliable, consistent picture of the country’s economic health. Given the repeated failures of the first quarter to be anything other than a disappointment, it seemed that something was off.

As currently tabulated, GDP was a big disappointment in the first quarter. As currently tabulated, GDI showed an economy that is still growing.

And with lingering issues around how the government adjusts its GDP data, Deutsche Bank’s LaVorgna argued in a note on Friday, “the drop-off in estimated Q1 GDP growth has not altered our view that the underlying fundamentals of the economy remain on firm footing.

Real GDI

As noted above, the Business Insider article was written May 30, 2015. Suddenly, there’s silence. This is why …


Whereas real GDP was revised up 0.3 percentage points, real GDI was revised lower by 0.4 percentage points, to -0.2%.

A quick glance at the recession bars in the above chart shows what negative GDI numbers traditionally mean.

Real Private Gross Domestic Investment

Real private investment (not to be confused with income) is a measure of investment in the real economy, not under the influence of massive amounts of government spending. The numbers are not pretty.


Government Spending

Government spending adds to GDP, by definition. Here’s the example I frequently use: If the government paid people to spit at the moon, it would add to GDP.

Real gross private investment normally accounts for only 13-16% or so of GDP. Private investment is a very volatile portion of GDP.

Wikipedia comments …”Gross private domestic investment is the measure of physical investment used in computing GDP in the measurement of nations’ economic activity. It provides an indicator of the future productive capacity of the economy. It includes replacement purchases plus net additions to capital assets plus investments in inventories. From 2002-2011 it amounted to 14.9% of US GDP, and from 1945-2011 was 15.7% of GDP (BEA, USDC, 2013). Net investment is gross investment minus depreciation. Of the four categories of GDP (investment, consumption, net exports, and government spending on goods and services) it is by far the least stable.”

The charts speak for themselves.

Mike “Mish” Shedlock.

Convergence: GDPNow 3rd Quarter Estimate Dives to 2.4%, FRBNY Nowcast Remains 2.2%

Ladies and gentlemen we are approaching convergence.

The Atlanta Fed GDPNow estimate for 3rd quarter GDP estimate took a 0.4 percentage points dive to 2.4% following today’s consumer spending report.

Meanwhile, the FRBNY Nowcast estimate for 3rd quarter remained flat at 2.2%.

GDPNow Latest forecast: 2.4 percent — September 30, 2016

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2016 is 2.4 percent on September 30, down from 2.8 percent on September 28. The forecast of third-quarter real consumer spending growth declined from 3.0 percent to 2.7 percent after this morning’s personal income and outlays report from the U.S. Bureau of Economic Analysis (BEA). Following yesterday’s GDP revision from the BEA and the Advance Economic Indicators release from the U.S. Census Bureau, the forecast of the contribution of inventory investment to third-quarter growth decreased from 0.60 percentage points to 0.26 percentage points and the forecast of the contribution from net exports increased from -0.13 percentage points to 0.13 percentage points.


Nowcast September 30, 2016 Highlights

  • The FRBNY Staff Nowcast stands at 2.2% and 1.2% for 2016:Q3 and 2016:Q4, respectively.
  • The net impact of the releases was small and left the nowcast virtually unchanged from last week.
  • Negative contributions from real personal consumption expenditures and single family houses sold were offset by positive contributions from orders of durable goods and wholesale inventories data.

3rd Quarter Nowcast


3rd Quarter Nowcast Detail


Converging Models

Judging from economic reports since the last Nowcast, I expected a Nowcast reading closer to 2.0%, if not below 2.0%. What  happened?

Note the highlights on inventories and durable goods new orders. It’s not that either was particularly hot. Rather, both did much better than the Nowcast model expected.

In contrast, the GDPNow components did not come in as good as its model expected. Thus we have converging models.

Inventories added 0.031 percentage points to Nowcast but GDPNow reacted like this: “the forecast of the contribution of inventory investment to third-quarter growth decreased from 0.60 percentage points to 0.26 percentage points”.

Nowcast +0.031 vs. GDPNow -0.340 (note the decimal position), on the same data. By the way, that vaunted inventory build that Econoday keeps predicting is fading into oblivion.

4th Quarter Nowcast


GDP Estimates

  • 3rd Quarter GDPNow September 30: 2.4%
  • 3rd Quarter Nowcast September 30: 2.2%
  • 3rd Quarter Markit September 27: “Around 1.0%” (see first link below)

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Mike “Mish” Shedlock

Consumer Spending Falls Flat, Economists Surprised Again

Personal income rose 0.2% in August, as economists expected. However, consumer spending rose 0.0% vs. the Econoday Consensus estimate of 0.2%.

The personal consumption expenditures (PCE) price index came in at +0.1% vs. a consensus of +0.2%. Last month the PCE was flat. This certainly is not what the Fed expected or wanted.

Year-over-year, PCE is up 1.0%, with the core PCE (excluding food and energy) up 1.7%.



August was a soft month for the consumer, both for income and especially for spending. Income rose only 0.2 percent in the month as wages & salaries, which had been on a 4-month surge, could inch only 1 tenth higher in August. Consumer spending, which had also been on a 4-month winning streak, came in unchanged as durable goods declined, largely reflecting monthly weakness in vehicle sales, as did non-durable goods, in part reflecting low fuel prices. Service spending advanced, at plus 0.3 percent, but at a slower rate than prior months. Despite the weakness in income, the consumer put money into savings which are at a 5.7 percent rate for a 1 tenth gain and a special factor that held down spending.

Inflation readings do show more life with the PCE price index up 0.1 percent and the core up 0.2 percent, both 1 tenth better than the prior month. Year-on-year, the overall measure rose 2 tenths to 1.0 percent with the core up 1 tenth to 1.7 percent and inching toward the Fed’s 2 percent goal.

For policy makers, what strength there is in prices is probably offset by the softness in income and spending. But the results of this report are no surprise, ultimately reflecting what was only a moderate gain for payrolls in August.

Recent History

Consumer spending posted a solid 0.3 percent gain in July despite softness in core retail sales during the month. Weakness in total retail sales in August has forecasters calling for only a 0.2 percent gain. Personal income has also been solid, boosted in June and July by outsized 0.5 percent gains in wages & salaries. But forecasters see August income also slowing to plus 0.2 percent. Modest strength following a run of weakness is expected for both the PCE price index and the core PCE price index where forecasters are calling for 0.2 percent gains for each.

Mike “Mish” Shedlock

Deutsche Bank: What the Hell is Going On?

Deutsche banks shares are plunging again in morning European tradings. It’s 4:13 AM in Chicago, but Germany is seven hours ahead making it 11:13 AM in Germany.

Deutsche Bank shares today set yet another record low in price. The Telegraph reports Deutsche Bank rout deepens: Shares plunge below €10 for first time ever.

What is going on?

Perception Issue


The first thing we can rule out is Deutsche Bank’s comment this is a “perception issue”.

Banking stocks do not plunge from over $100 to under $10 on perception issues.


‘We should look at the complete picture’, says Deutsche Bank’s CEO
John Cryan. Deutsche Bank has more than 20 million customers. We are and remain a strong Deutsche Bank.”

“There are forces now under way in the market that want to weaken confidence in us. Our job now is to ensure that this distorted perception does not more strongly influence our day-to-day business,” said Cryan.


Hedge Funds Pull Business From Deutsche Bank

The Financial Times reports Hedge Funds Pull Business From Deutsche Bank

Turkey Buyers



I had several links as well.

What the Hell is Going On?

I do not know precisely, nor does anyone else. It could be exposure to Italian banks. It could be other counter-party risks. It could be a derivatives problem.

It could be Deutsche Bank’s derivatives book is so massively tangled that the bank itself is clueless where it stands.

But it is 100% clear that something major is wrong.

Regardless of what is wrong, this is the key question: Is a Depositor Bail-In Coming Up?

Get Out of German Banks Now!

No matter what you believe, why take chances?

Mike “Mish” Shedlock

Extreme Incompetence: Failure to Destroy Your Own Currency Even When You Try

Japan’s prime minister Shinzo Abe is the most incompetent politician in the world as measured by his words vs. what is happening.

Abe has repeatedly promised promised to get inflation above 2%. That goal is amazingly easy. I provided examples twice. Yet here we are. Abenomics is a complete failure.

For the 20th time (at least)  in 10 years, Japan Suffers Setback in War on Deflation.

Japan remains in the grip of deflation, with consumer prices falling for a fifth consecutive month and price momentum slowing further in August.

Headline consumer prices were down 0.5 per cent on a year earlier, in line with analyst expectations, reflecting the impact of weak oil prices and a strong yen.

But more alarming for the Bank of Japan was the weakening of a crucial measure of inflation that strips out volatile food and energy prices to an annual rise of just 0.2 per cent.

That suggests lower prices for imported commodities are spreading to domestically produced goods and services, highlighting how hard it will be for the BoJ to reach its 2 per cent inflation target in the near future.

Commitment to be Irresponsible

On September 21, I commented on Japan’s “Commitment to be Irresponsible”.

Instead of targeting 2% inflation, the bank of Japan announced it had a goal of exceeding 2% inflation.

I nearly fell off my chair laughing for two reasons.

  1. The asininity of demanding inflation in a deflationary world.
  2. Failure to achieve that goal despite the ease in achieving the goal.

These economic illiterates actually believe that announcing inflation targets will generate inflation. If that was the case, the announcement of a 2% inflation target would have worked a decade or more ago.

Amazingly, mainstream media praises Abe and the Bank of Japan for their firm commitment to insanity.

Liar or Fool?

One either has to be a liar (not really wanting inflation), or a fool to not be able to generate inflation.

Once again, here is my recipe.

Mish’s Four Pronged Proposal to End Japanese Deflation

  1. Negative Sales Taxes
  2. One Percent Tax, Per Month, on Government Bonds
  3. National Tax Free Lottery
  4. Hav-a-Kid

For plan specifics, please see Mish’s Sure Fire Proposal to End Japanese Deflation: Negative Sales Taxes, 1% Monthly Tax on Gov’t Bonds.

What can possibly go wrong?

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Mike “Mish” Shedlock

Conversation With Atlanta Fed on Today’s GDP Revision and Its Impact on 3rd Quarter GDP Estimates

Today the BEA released its Third Estimate for Second Quarter GDP. The third (final) estimate bumped up the prior estimate from 1.1% to 1.4%.

The BEA changed the name from “final estimate” to “third estimate” because GDP is subject to revisions years or even decades later.

I am curious how this would impact the Atlanta Fed GDPNow forecast and the FRBNY Nowcast estimate both due out tomorrow. I have a detailed answer from Pat Higgins at the Atlanta Fed, creator of GDPNow.

Hi Mish,

I can give you a more detailed answer tomorrow after the GDPNow update is released. We don’t do an update today because the monthly real PCE data consistent with the revised Q2 real PCE growth rate are not released until tomorrow.

Except for consumer spending, each GDPNow subcomponent forecast is a weighted average of two forecasts. One forecast from a quarterly BVAR [Bayesian Vector AutoRegression] model that uses the GDP subcomponents and one forecast that uses the monthly source data with bridge equations.

The forecasts from the quarterly BVAR model can change when the quarterly subcomponents are revised. Subcomponents that put a nontrivial weight on the quarterly BVAR forecasts, like intellectual property products investment, can change somewhat after a GDP revision. Subcomponents that do not, like residential investment, will probably not be impacted much by the revision.

The forecast of Q3 real consumer spending can change because of the revisions to monthly PCE generally released the business day after the GDP report. And the forecast for the change in inventory investment can change as well. GDPNow forecasts the revision to inventory investment for the previous quarter (Q2 currently) up until the third GDP report released today. Going forward, GDPNow will use the revised Q2 inventory investment number released today when forecasting the change in Q3 inventory investment because that Q2 number will not be revised again until next year.

Today the “Advance Economic Indicators” report was released.

Tomorrow’s GDPNow update will also take that data into account. That could make it a tricky to determine how much, if any, revision to the GDPNow forecast is due to the GDP revision, the monthly PCE revisions and data for August, and the advance economic indicators release.

Best regards,

Thanks Pat!

I learn a lot from these discussions, and what I typically learn is that things are not as straight forward as it seems.

I have a great deal of respect for research analysts like Pat Higgins and corresponding contacts at the New York Fed.

I also have a lot of respect for the BLS economists that I have talked with. The BLS does not even have access to the data they need to do their job because of privacy restrictions. There are seemingly easy solutions (encrypted names and social security numbers for example), but nothing is as easy as it seems in large bureaucracies.

Regardless, it’s important to distinguish researchers from those who make policy decisions based on that research.

Mike “Mish” Shedlock

EC Takes Germany to Court Over Unfair Road Taxes: Freedom of Movement of Goods Discrimination

“Millions of foreign vehicles criss-cross Germany every year, one of the few countries on mainland Europe not to have widespread tolls on its roads. Neighbouring countries such as Austria, Switzerland and France all charge motorway users, triggering resentment from drivers in the German regions that border them,” says the Financial Times.

Germany responded by placing its own tolls. Germany also let owners of German registered vehicles deduct those tolls from their annual vehicle tax bill.

Unfair Discrimination” whines the EU nannycrats to the European Court of Justice.


Brussels is taking Berlin to court over Germany’s controversial plan to charge foreign drivers for using its roads, bringing a simmering two-year row into its final stages.

While the charges of up to €130 per year will apply to all users, German registered vehicles are able to deduct the charges from their annual vehicle tax bill — a benefit that the commission says is “discriminatory”.

The proposed fees for short-term access to Germany meanwhile are “disproportionately high”, according to the European Commission, which made the decision to bring Germany before the European Court of Justice on Thursday.

Germany had braced itself for a long legal fight, with the country’s transport minister stating in April that he was prepared to take the disagreement all the way to the EU’s top court. If the court agrees with the commission, Germany would face having to rewrite its law — and face fines if it does not.

Alexander Dobrindt, the German transport minister, said the toll “conforms to European law, and the European Court will confirm that”. He has argued that there are tolls in other European countries and money raised through the levy will go towards Germany’s transport infrastructure.

“Germany doesn’t need any toll,” said Oliver Krischer, a leading Green MP. “It doesn’t yield anything, is highly bureaucratic and contrary to European law. It also has no incentive effect in terms of the environment.”

The European Commission is also examining a similar scheme in the UK, in which British truck drivers can deduct a levy from their domestic vehicle tax, while foreign drivers cannot. This investigation is still ongoing.

“We are concerned that the German system discriminates against drivers from other member states,” said a spokesperson for the European Commission. “It will lead to a situation where German users — and only Germany users — are de facto exempted. When the single market rights of citizens are being threatened, this is where the commission will act.”

Imagine Wisconsin or Indiana taking Illinois to court over tolls or gasoline taxes.

Illinois and Indiana have tolls, Wisconsin doesn’t. Residents in Illinois and Indiana opt for a device that automatically pay the tolls. If you don’t have the device, you pay a higher rate. Is that discrimination against Wisconsin?

Nearly every state has lower sales taxes then Illinois. Is that unfair discrimination?

This kind of bureaucratic nonsense is yet another reason, the UK does not need the EU.

For more on this topic, please see Gang of 27 Hits UK with Impossible Demands: EU Seeks “Inferior” Deal for UK, Spain Wants Gibraltar.

Mike “Mish” Shedlock

Heavy Truck Sales vs. GDP: Sales Plunged 29% in August from Year Ago

There’s an interesting correlation between heavy truck sales, GDP, and the S&P 500. If the relationship holds, it spells bad new for the already weakening second half recovery meme.

We’ve never seen a plunge this steep that didn’t foretell a recession,” says Bloomberg columnist David Ader.

Bloomberg reports As Heavy-Truck Sales Go, So Goes the Economy

For most people, the economy’s ups and downs are best measured by famous indicators like monthly job reports and quarterly releases of gross domestic product. But students of the arcane took special notice earlier this month when the Bureau of Economic Analysis released some disturbing data that didn’t make anybody’s front page. In August, domestic heavy-truck sales fell 29 percent from the same period of 2015, the weakest month in well over three years.

Any drop that dramatic could always be an anomaly, but heavy-truck sales have been slipping for two years. Broad weakness in this category has historically been a reliable hint that a recession is on its way.

There are other worrying signs. Caterpillar has said that used-machinery prices are down 10 percent from a year ago. That could also reflect the impact of oil and mining industry problems, yet a price decline in used construction equipment could have a dampening impact on new-equipment sales for big manufacturers.

Another warning comes from the Cass Freight Index, a measure of North American freight volumes and expenditures. In August, Cass noted that its Expenditure Index was down 3.3 percent from July and 6.3 percent from the previous August. These measures, too, have shown weakness over the last two years.

Weak truck sales have sometimes given false signals about a recession over the last 30-odd years. But the sheer size of this August’s drop looks different. We’ve never seen a plunge this steep that didn’t foretell a recession.

Hitting the Brakes


Truck Sales vs. S&P 500

Cass Freight Index

I regularly follow the Cass Freight Index. It has indeed been performing miserably.

Cass Freight Index Shipments


Shipments have risen every month this year. Shipments are up 0.4% from last month.

However, month-to-month fluctuations is a very poor way of looking at things. The Cass index is not seasonally adjusted. Shipments normally rise from January forward. Towards the end of the year, shipments will start declining.

Instead compare August shipments to August shipments in prior years. Shipments are lower than in 2015, 2014, and 2013. It’s a clean sweep of weakness.

Cass Freight Index Expenditures


The plunge in trucking expenditures is unusually steep compared to prior years. It’s a strong sign of huge overcapacity in the industry.

Mike “Mish” Shedlock

Trade Deficit Shrinks a Bit More Than Expected: Impact on GDP Estimates?

Today’s report on International Trade shows the US balance at $-58.4 billion. This is a  better than the Econoday Consensus estimate of $-62.3 billion, and even a bit better than the most optimistic guess of $-59.2 billion.


The nation’s deficit in goods trade narrowed slightly to $58.4 million in August. Exports rose a solid 0.7 percent in the month reflecting strength in industrial supplies, vehicles, and also consumer goods. The gain in exports comes despite a 3.5 percent monthly fall back in food exports which surged 34 percent in July and made for a rare 3.0 percent jump in that month’s total exports. Imports also rose in the latest month, up 0.3 percent and reflecting a bounce back for capital goods as well as a gain in food. The gain in exports is welcome as is the gain in capital goods imports.

Balance of Trade


Balance of trade chart from Census Bureau.

Impact on GDP?

The impact on tomorrow’s Atlanta Fed GDPNow estimate and the FRBNY Nowcast estimate for 3rd quarter GDP is guesswork two ways.

First, I do not know what their model predicted. Second I do not know how their model will react even if I did know what it predicted.

Thus, this seemingly good result might not turn out that way if the models predicted even better results.

Nonetheless, I am willing to take a stab: The impact from this report will be small, but slightly positive on third quarter GDP estimates (+0.05 to +0.10) percentage points.

Mike “Mish” Shedlock

India Raids Pakistan, Claims “Significant Casualties” Inflicted: Don’t Worry It’s Just a “Surgical Strike”

Border skirmishes between India and Pakistan have been going on for years. But with social mood darkening everywhere, and with India making the claim ‘Significant casualties’ inflicted on ‘launch pads’ for militant attacks, one can’t help but wonder when this erupts in a major way.

The Financial Times reports India launches ‘surgical strikes’ on Pakistan terror targets.

India said it had carried out “surgical strikes” overnight across its disputed border with Pakistan to target groups of militants that were allegedly planning to carry out terror attacks on Indian territory.

In a briefing, Lt Gen Ranvir Singh said the strike — which was carried out along the line of control that divides the disputed Kashmir province between India and Pakistan — had inflicted “significant casualties” on what he described as “launch pads” for terrorism.

Lt Gen Singh said the army had acted on “specific and credible” information that “terrorist teams had positioned themselves at launch pads along the line of control with an aim to carry out infiltration in terrorist strikes in Jammu and Kashmir” and various other parts of the country.

However, Pakistan’s army said there had been no surgical strikes, just heavy Indian firing, to which Pakistani forces responded in kind.

The action — and the highly publicised way in which it has been announced — comes a fortnight after militants attacked an Indian military base at Uri, killing 18 Indian soldiers. New Delhi has publicly blamed the attack on Pakistan.

Everything is under control. A quick check shows the dollar is quiet, the stock market is quiet, and gold is quiet.

It’s just two nuclear armed states fighting over borders and religious beliefs. What can possibly go wrong in this M.A.D. world?

Mike “Mish” Shedlock