Kass: The Big Picture Remains Cloudy
NEW YORK ( Real Money ) -- While fourth-quarter 2012 real GDP fell by -0.1%, reflecting lower exports, a decline in federal government spending and a large drop in inventory investment, if one takes out the contraction in inventories, final demand was +1.1% (annualized). The fourth-quarter annual rate of inflation was +0.6%.
For the full year of 2012, real GDP grew by +2.2%, and inflation rose by +1.8% -- nominal GDP increased by a tepid +4% (and those with plenty of juice from the Fed).
Growth remains slow, as the household sector continues to deleverage.
Despite market optimism, the consumer sector remains the Achilles' heel to growth, as I don't see the deleveraging ending anytime soon:
- Household savings rates are well below historical averages.
Given the fiscal headwinds, much lies on the shoulders of the corporate sector, which will need to take the growth baton from the consumer sector.
Business fixed investment was weak last year, reflecting weak global demand and the uncertainties of tax and regulatory policies.
As evidence of my conerns regarding a revival of business fixed investment, factory orders for December rose by a less-than-expected +1.9% (consensus was +2.3%), as the previously reported durable goods component was lowered. Significantly, core capital expenditures (non-defense capital goods, excluding aircraft) declined by -0.3% (the initial report was +0.2%). Durable goods orders also were revised lower by -0.3% (to a rise of +1.0%).
Given the economic and policy uncertainties (particularly the upcoming fractious Washington follies), I find the renewed belief in an improvement in corporate confidence (manifested in more hirings and enlarged capital spending) to be an unjustified leap of faith.
The U.S. will likely benefit from a slight acceleration in Asia's growth. (There was a small increase in the January China PMI services index, to 56.2, over the weekend.)
Contrary to most market observers, however, I don't see an all-clear sign yet in Europe. Though stabilizing from a low base of economic activity, the overall growth outlook in the EU still remains subpar and challenging.
Overnight there are emerging political and economic chinks in the armor, as Spain Prime Minister Rajoy has been accused of accepting illegal payments. Spain's 10-year note is yielding 5.38% (up almost 20 basis points), for a seven-week peak in yields. As well, the Spanish IBEX has fallen to a seven-week low (down by 2% after falling 6% last week).