Economy in U.S. Expands at a 2.8% Rate on Inventories
Comment of the Day

November 07 2013

Commentary by David Fuller

Economy in U.S. Expands at a 2.8% Rate on Inventories

Here is the opening from this Bloomberg report on a soft economy
Household purchases and business spending on equipment slowed in the third quarter, even as a buildup in inventories unexpectedly boosted the pace of economic growth in the U.S.

The 2.8 percent annualized gain in gross domestic product followed a 2.5 percent increase in the prior three months, Commerce Department figures showed today in Washington. Final sales, which exclude unsold goods, rose 2 percent in the third quarter as consumer spending climbed at the slowest pace since 2011 and corporate investment fell.

The biggest gain in inventories since the beginning of 2012 risks holding back the economy this quarter as companies limit production. A 16-day partial shutdown of the federal government added to the headwinds that the Federal Reserve is trying to offset by maintaining $85 billion in monthly bond purchases intended to keep borrowing costs low.

"You've got this big jump in inventories, and that's clearly in excess of what the flow of spending is," said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who projected a 1.9 percent gain in final sales. "If you stockpile all this inventory but your sales don't really change all that much, then what you're going to do in the next quarter is cut back."

Economists at Morgan Stanley, Credit Suisse, TD Securities USA LLC and HSBC Securities America were among those who said they might reduce their forecasts for GDP.

"Fourth-quarter growth appears to be on a trajectory for growth a bit below 1.5 percent at this point," Morgan Stanley economists said in an e-mail to clients.

David Fuller's view Ben Bernanke has had all the fun, as I have mentioned over the last few months, 'saving the world'. Janet Yellen has grasped the short straw. She is better qualified to lead the Fed than anyone else, but she may not enjoy it.

The critics who are calling for an end to quantitative easing (QE) will grow more numerous and vocal. If she postpones QE tapering, as seems likely, she will be criticised for increasing financial instability and risking the creation of a stock market bubble. When she actually commences tapering, she will be accused of roiling markets, at home and abroad.

QE has had little effect on unemployment, mainly because the accelerated rate of technological innovation is replacing jobs more quickly than the modest economic recovery is creating them. The Fed has painted itself into a corner by linking QE to an unemployment target of 6.5%, unless millions of additional Americans decide that they will no longer look for part time, lower paid jobs.

Soft commodity markets reflected by the unweighted CCI, WTI crude, Brent crude, copper, nickel, soybeans, corn, wheat, coffee and many others confirm that commodity price inflation is not a problem. This may encourage Janet Yellen to postpone QE tapering.

Interestingly, Arabic coffee has fallen close to the psychological 100 level, is overextended after the latest persistent decline and saw an upside key day reversal today. There are bound to be plenty of shorts in the market given the overall trend and the big contango. This is becoming a speculative buy but be careful because it is a huge contract and the contango would be costly if the market only ranged near current levels.

Meanwhile, with Wall Street overextended on QE tapering postponement, we finally saw some downward dynamics today on key indices. These include the DJIA's and S&P's key day reversals, the Russell 2000's second downward dynamic, and the NASDAQ's particularly big downward dynamic. Closes above the recent highs are now required to offset current scope for further sideways to lower trading. Many other stock markets under Wall Street's influence are also susceptible to further near-term reactions.

(See also this week's earlier lead comments on Wall Street.)

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