Wednesday, August 25, 2010

More Keynesians Surprised and Disappointed by Weak Data

JPMorgan's Michael Feroli: "The July durable goods report was a major disappointment and raises the risk that third quarter GDP growth prints below 1%...The downshift in the pace of capital spending is particularly worrying as this was the strongest, most reliable sector of the economy over the past year...Inventories at manufacturers of durable goods increased $1.8 billion in July, well below the $3.3 billion average increase in stocks over the prior three months--another factor which lends downside risk to Q3 GDP growth." (ViaZeroHedge)

Millan L. B. Mulraine at TD Securities: All things considered, this was a shockingly weak report [on new home sales] and when added to the equally depressing existing home sales report (released yesterday), it suggests that the soft under-belly of the U.S. housing market is being exposed, following the expiration of the artificial boost from the first time home buyers’ tax credit program. And with the economic outlook continuing to soften and labour market conditions remaining quite weak, we expect the demand for housing to fall further, in spite of the very favourable buying conditions. Moreover, given the elevated level of unsold homes, the downward pressure on home prices should grow as the housing sector searches for a new bottom. (ViaWSJ)

Bottom line: The above are examples of typical trend following economists who have no idea how the economy operates. If a number moves against a previous trend it is surprising or disappointing. Where is the analysis behind the data trends? Sadly, mainstream economics has no theory. A month ago all the Keynesian trend followers were saying there was no possibility of a double-dip recession. Today, they are surprised.

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