GDP...The New LEADING INDICATOR

Throughout my career in the brokerage business, I was always taught that the GDP was a lagging indicator. Meaning that it showed what had happened last quarter and did not necessarily forecast what was going to happen in the next quarter...that would be a leading indicator like ISM, consumer sentiment, durable goods orders, housing permits, etc. Sometimes, the GDP was labeled a coincident indicator, which would mean that it was reflecting what is going on now, but it was never seen as an indicator of things to come.

today, the GDP was much stronger than anticipated, even by the most bullish analysis. After the report, the analysis came in fast and with almost a unanimous call for further growth and for the fat lady to start singing for the end of the bear market and the recessionary period of the last few years.

HUH? Whatever happened to lagging indicator status of the GDP? Past quarter GDP performance is not an indication of future results. It is a report on the past. Why now is it a predictor of the future? OH YEAH, it fits the scenario that bush wants us all to buy into...get it, buy into with all the tax cuts & low interest refis. Why the pundits are extrapolating the incredibly, unbelievably, extraordinarily, amazingly(not my adjectives) strong Q3 GDP information into the current quarter and 2004 I do not understand. Why isn't anyone talking about sales being 'pulled forward', the apparent slowdown in growth of homebuilding and refinance activity, companies still cost cutting & announcing further labor force reductions, inventories still being depleted and not rebuilt, CEO's still talking cautiously, NO JOB GROWTH at all(what type of growth will we need for jobs to be added?), government spending on war goosing GDP beyond sustainable levels, or any of the other obvious questions that would be prudent now that the number is in and shows how powerful monetary stimulus (money printing) can be?

the real questions might be, if growth was so great and is expected by most to continue, then why is the FED willing to stay so accommodative and leading the markets to think that they wont raise rates for a "considerable period of time"? Are they just being really nice? Are they no longer worried about overheating the economy and causing rampant inflation?(more worried about DEFLATION in an economy that's growing at that pace?) are they not real believers in the 7.2% growth rate? Are they concerned about something we are not aware of? What is different this time? And how will the FED get out of this very accommodative interest rate environment without pressuring home prices? Oh, never mind that, they aren't raising rates anytime soon. But, when rates rise, the cost to carry a home will increase. Values will need to decline to keep a sort of "carry" equilibrium. Adjustable Rate Mortgages will adjust UP, creating serious issues for homeowners,especially the new ones who have never had to deal with repairs, maintenance, insurance, energy and now interest rate costs increasing!!!!, credit card debt that is being accumulated will cost more and be more difficult to afford, and 0% loans for durable goods will vanish creating real problems for companies trying to sell us anything we might really have to pay for going forward. That will all feel very inflationary and cause consumer spending to come to an abrupt halt. But forget about that for now, we'll get back to that next year sometime.

it is much more popular to look at the rosy data and say "isn't this great! The recession is over! I may not have a job, but I'm sure one is coming soon." once again the market is safe and profitable place to save and invest again. I'm not really sure why with all the mutual fund chicanery and NYSE upheaval going on, but nevermind that, I gotta be on the market gravy train or I'll miss out again! Speculation is back in vogue and the NASDAQ is chugging along at its best pace since....ever. Don't miss out on the next boom time or you will regret it. Or will you?.

seems to me, the problems that were on the front burner just 6 months ago, are now on the back burner, or maybe they are in the fridge for now (amazing what big stock gains can do to your memory). Regardless of feelings and perception, most of the problems remain including, but not limited to, under funded pension plans (new bush administration reform bill just passed letting major corporations off the hook for pension contributions for a few years. This doesn't fix the problem...just delays the day of reckoning for a few years. And in fact, the Pension Benefit Guarantee Corporation is almost insolvent and social security system is broken with the baby boomers readying for retirement years...we'll address these issues in the next presidential term.), almost every state has a budget deficit (most notable of late being California's $8bil annual deficit and $30bil accumulated deficit), jobs are still being eliminated by major corporations and others are being sent overseas...most of the jobs lost during the last 3 years will NEVER come back...they are permanently gone, wall street is still defrauding/deceiving the public in various ways (mutual fund market timing scandal, NYSE specialist system about to be eliminated due to fraud, corporate scandals still being exposed, etc., etc.), war on terror costing much more $$$ and lives and security than expected or can be absorbed, other potential geopolitical firestorms looming in North Korea, Iran, Israel, Syria, Saudi Arabia, etc., potential housing slowdown, potential auto sales slowdown, consumer debt levels up at unsustainable and in some cases unserviceable levels (personal bankruptcies still hitting new highs!), healthcare costs continuing to rise, energy costs high and problems with oil, natural gas, and electricity grid, huge federal budget deficit, huge trade deficit, unconscious political leadership only concerned with staying in power, and finally, the longterm decline of the American society at large...including immigration, education, infrastructure, healthcare, poverty, and unprecedented hatred towards the United States.

OK, ok, so I got into a rant, but why is it that the GDP is now a leading indicator? And what exactly is it leading to? 99 out of 100 CNBC analysts say its leading to more growth and a sustained economic recovery. When they have an interview with the "1" that thinks something other than bullish things, I'll let you know what might go wrong.

have a grateful day!

Larry