Final Revisions of First Quarter GDP: Stimulus Not Working

This past weekend was the G-20 meeting, and the anticipated brawl between the US and Germany on spending versus cost cutting… Well, the brawl didn’t happen, instead they agreed to say that they will “tackle deficits once economic recoveries are assured”… Which here in the US means… NEVER! Not that the economic recovery won’t eventually come along, but that our lawmakers aren’t going to stop spending… However, there are elections that might just change their minds, eh?

The currencies can’t figure out what just happened in Toronto, so they are trading in a tight range, with a bias to sell dollars this morning… And gold is nearing $1,260 once again, after that big sell off one day last week.

Well… Friday, we saw the final revision to first quarter GDP print… Let me take you back in time first, to a time when the original first quarter GDP printed and the government tried to tell us it was 3.2%… Here’s what I had to say…

“Yes, GDP for the first quarter just printed a revised downward number of 3%. This originally printed at 3.2%, so the trend there doesn’t look good for the final revision later this month. 3% GDP with good domestic demand represents nice growth. However, 3% GDP without domestic demand, and nothing but government stimulus, spending, easy credit, historic low rates driving the GDP, and you do not have a strong economy.”

Well… Guess what? The final revision was moved down to 2.7%… We sure didn’t see government officials all over the cable news stations on Friday, pounding their chests, and bragging about how their “stimulus was working,” now did we?

And like I said a month ago… “Let’s see what happens when the government removes their stimulus”… Maybe now we don’t want to see what will happen… I know I certainly don’t!

So, add first quarter GDP to the list of economic data we’ve seen lately that just doesn’t smell like an economic recovery is taking place… We’ll see quite a few data prints this week, some not so important, and some, like Personal Income and Spending (today), S&P/CaseShiller Home Price Index, and Consumer Confidence (tomorrow), and the Chicago Purchasing Manager Index (Wednesday), that will carry the bulk of the load this week. So by Friday, when everyone is attempting to get out of Dodge early to head to the lake, or the Hamptons, or whatever, we’ll have a better understanding of the data here in the US… My guess? Well… My guess is that it will all print soft, and not give the markets a warm and fuzzy about the US being the engine of global growth!

Getting back to G-20 for a minute – and the thought that our government keeps pressing on with, and that is… You have to spend to get out of this mess… And the thought that I’ve said over and over again that to think that is just plain wrong, was addressed in a story that I read on Friday… Wanna read a great story that supports my stance and shoots holes in the government’s stance? Click here.

Here’s a snippet for those of you in a hurry… OK… Let me set this up for you first… Allan Meltzer is a well known and distinguished monetarist who advised presidents Kennedy and Reagan… But he is perhaps better known for his pushing Prime Minister Margaret Thatcher toward tough fiscal policies that launched Britain to years of balanced budgets, modest spending increases, falling joblessness, and extraordinary economic growth.

“When Allan Meltzer was asked about the government’s stance toward spending instead of tougher fiscal policies, he had this to say… ‘If Obama announced a strategy to deal with the long-term debt and stopped doing things to increase the uncertainty that businesses face, it would do a great deal to stimulate the economy,’ declares the 82-year old Meltzer.

“Meltzer is right, and most of the ‘experts’ – from Paul Krugman to Ben Bernanke – are wrong. The best stimulus is a solid, credible plan to radically reduce government spending, starting right now.”

Great stuff!

And keeping with the theme of deficits… The Bloomie reported on Friday that: “Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of US GDP.” Hmmm… Wonder where the Chicken Littles are that cried about Greece?

OK… Enough on that! There has to be happy news out there somewhere!

Oh! Hey! It looks like Sweden’s Central Bank (the Riksbank) will join the ranks of the rate hikers this week! Now, I don’t believe the markets are on board with this, but as usual, I’ll go out on a fat limb, and say that the Riksbank hikes rates 25 BPS this Thursday…

In Australia… The Aussie dollar (AUD) continues to inch higher after the Prime Minister change last week… The thought then, was that the new PM, Gillard, would not go forward with the mining tax that had hung over the Aussie dollar like the Sword of Damocles! But, now I hear that Gillard will go forward with a watered down tax… I doubt she’ll get the support she needs for her watered down tax either, so we could see her thrown out on her ear too, should she continue down that path!

In Canada, we’ll see the color of the April GDP report later this week (Thursday)… The most recent data in Canada has been softer than expected, throwing cold water all over the hopes that the Bank of Canada (BOC) would hike rates next month. But still, the Canadian dollar/loonie (CAD) remains well bid…

OK… I read a story last night about how traders and hedge fund managers have “backed off” the selling of euros for now, to see how the nearly $1 trillion aid package plays out… If in a couple of months, there are no signs of stabilization, then the selling could come back… But for now…

“A successful bond sale by Spain and an agreement by EU leaders to disclose how banks perform on stress tests have tempered concern that nations will have trouble financing themselves. Spain sold 3 billion euros ($3.7 billion) of 10-year debt on June 17 to yield of 4.864 percent, below the 5.04 percent that the bonds traded at before the sale. Investors bid for 1.89 times the amount offered.

“The European Central Bank raised its euro-region growth forecast for this year on June 10 to 1 percent, from a previous estimate of 0.8 percent. It will grow about 1.2 percent in 2011, the ECB predicted.”

So… For now, there’s a light at the end of the Eurozone tunnel; the question is… Is that daylight on the other end… Or… Is it a train coming toward them?

And to that I saw this… “Greece is on its way to overcoming the sovereign-debt crisis and ultimately will succeed, said Paul Thomsen, head of the International Monetary Fund mission that is helping the country. ‘The effort has begun vigorously and I firmly believe that Greece will succeed,’ he told Greek newspaper To Vima.”

To recap… The G-20 left the markets confused, and not really knowing exactly what the G-20 leaders wanted. So… The bias this morning is to sell dollars… The US data has been soft recently, and there are quite a few data prints this week to confirm that the economy is not growing or recovering! Aussie and Canada are inching higher versus the dollar this morning, and Chuck went out on a limb (a fat one) to say the Riksbank would hike rates this week in Sweden…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning