Expectations and Economic Data Disaster
February 1, 2009 7:23 am
Several pieces of important economic data were released last week including GDP, Chain Deflator, Chicago Purchasing Managers Index and The University of Michigan Consumer Sentiment. Traders have typically compared the expectations to the actual release while assessing the data, but it is important to note just how low these expectations actually are.
On Friday morning, investors seemed initially excited with the release of the Gross Domestic Product at -3.8% vs expectations of -5.5%. With expectations so low and constant revisions to previous month’s data, it is impossible to rely or even react appropriately. The last time we have seen abysmal economic data such this was way back in the late 1970’s and early 1980’s.
The real problem we see is that the Chain Deflator, which is widely recognized as a measure for inflation, has begun to show some worrisome signs of slowing. This is a sign that deflation is upon us. Deflation has been known to cause economic plagues such as increased unemployment, decreases in salaries and reduced company profits.
With that in mind, it is vital to keep a constant eye on deflation. The good news? The Federal Reserve has lowered rates to zero and can keep rates low for a while as there are many forces preventing inflation di=uring the near-term. As the FED is finding that it is literally impossible to get banks to lend money , there is little fear that this will produce inflation to offset the deflation anytime soon.
Once more thing….The latest University of Michigan measure of consumer sentiment is absolutely appalling. (See Chart above). No comment is needed beyond the thought that consumers have seemingly lost all hope.