Before we move into today's information, let's backtrack over last week's GDP report. In the previous article I expressed a high degree of bearishness regarding consumer spending. Yet in the latest GDP report personal consumption expenditures increased 2.1%. This was largely due to a 9.1% increase in durable goods purchases. However, as this chart shows
total real durable goods expenditures jumped from a low level in December to a higher level in January but have since dropped in each of the last two months. In addition, notice that the first quarter totals are still below the September and October levels. Finally, consider this:
The major automobile makers on Friday posted further sales declines in April, punctuating a brutal week for an industry that saw one of its icons plunge into bankruptcy and signs that a similar fate awaits its biggest U.S. player.
Simply put, I still don't see how consumer spending can continue increase at a meaningful rate when real estate is still dropping, job losses are compounding, household debt levels are still high and stock market losses are still deep. At minimum we need at least one more quarter of data before we should start celebrating.
That being said, let's move onto the the second area of GDP -- total domestic investment. This comprises 11.21% of total GDP. Here is a chart of the percentage change in total gross investment:
It has dropped in 9 of the last 12 quarters -- and one of the quarters where we saw in incease was only an increase of .4%. In addition, last quarter saw a decrease of 51.8% from the preceding quarter. Simply put, that number is terrible.
Let's break this number down into its sub-parts -- residential investment, non-residential investment and equipment and software investment.
Do we really need any more houses? No. (Thanks to Calculated Risk for the graphs)
The existing home inventory is still at very high levels. And this number does not include the "shadow inventory" of houses in foreclosure that are still on bank's balance sheets.
While the new home inventory is down to a more normal level
The months of available supply are current sales levels is still at sky high levels. In addition,
The vacancy rate is still at abnormally high levels, indicating we're not using all the houses we've built. As a result:
Housing starts are at multi-decade lows. In other words, we're not building our way out of this recession.
Here is a chart of the percentage change from the preceding quarter in non-residential structure investment.
Last quarter this number dropped by 44.2%. Also note this number continued to increase until the 4Q08. In other words, this area of the economy is just starting to contract. Considering the severity of last months drop and the continued tight credit conditions it's difficult to see this area of the economy picking up any time soon.
Software and equipment
Here is a chart of the percentage change from the preceding quarter in software and equipment investment:
This number has been weak since 2Q02 and has continued to drop at increasing levels for the last 4 quarters. This is because:
Industrial production has been dropping at fast rates on a year over year basis. In addtion,
Capacity utilizaiton is at its lowest level in over 40 years.
In conclusion, it's difficult to see investment pulling us out of a recession. Housing is already overstocked. Non-residential spending recently ended a building spree and low industrial production and capacity utilization indicates business has a lot of excess capacity to bring back on line before we add new capacity.