Divergent Pictures of the Economy

Monday Night Football! The Saints play the Falcons tonight and it should be a good contest.

Divergent Pictures of the Economy
Sometimes things just do not add up, and right now is a great example of that kind of disconnect. There has been plenty of economic data that looks fairly good, but then there are several real world examples of a decaying situation. Lets take a look.

Economic Indicators
GDP
Last week GDP printed above expectations with a 3.5% showing for the quarter. I covered the pumped up GDP number and do not wish to revisit that topic. On the surface GDP looks to be expanding, and at a good clip.

Home Sales
Home sales have moved up (no doubt due to tax credit and seasonality in the summer) and price declines has slowed down. Pending sales also grew. Again, on the surface a good data point.

ISM Over 50
Today's ISM numbers were above expectations, printing a 55.7. Any number over 50 implies expansion. Another ray of light.

Stock Indices Much Higher
Huge move up from the lows set in the Spring.

Taken together these items would in the past point towards some kind of turnaround. Of course this time there is unprecedented government stimulus working to prop up these numbers, but ignore that for a moment. The data has improved.

So what's the problem? In an expanding economy would you also expect to see:
-Unemployment at 10%
-CIT declares bankruptcy after being bailed out numerous times
-9 banks were closed by the FDIC on Friday evening
-GMAC has returned to the government well yet again for more cash
-The Pragmatic Capitalist notes that a large trucking company is on the brink of collapse: YRCW: NO SUSTAINED ECONOMIC RECOVERY Quote from the CEO:
"We’re not anticipating any growth in the economy for the remainder of this year and at least for the first half of next year"
-The Financial Ninja (he has returned!) notes (among other things) that the big banks are hoarding cash as if something terrible is going to happen

I named this site Economic Disconnect in reference to the giant chasm between reality and perception as things were in 2007. It is almost 2010 and things really have not changed!

What is especially troublesome is that not one change to the financial system has seen the light of day. Massive leverage, bad debt bets, and terrible management were all given a free pass in the name of "systemic risk". Adding to this was organized looting via AIG payouts and a refusal to force losses on bondholders.

Putting this all together I think we see that any data points that could be influenced have been, while those outside direct influence continue to show pressure. The game plan has always been to wait things out and hope some kind of hail mary pass occurs to jumpstart the economy. No structural changes were made. No paths to sustainable growth have been cleared. Fraud has not been rejected from the system, it is instead relied upon.

The improving data will have to go head to head against what is happening on a daily basis on the ground. Is it possible to have GDP growing at 4% while commercial real estate crumbles? We may soon see such a moment. If unemployment hits 12% can you really see rising home sales?

I think going forward we will see many such opposing metrics. Expect a volatile situation.

Have a good night.