GDP Miss Far Bigger Than Announced; Real GDP is 0%

You know I've adored reading Mish's cut-to-the-chase research, right?

Here's why. He right. He's always right. And he's right in the right way. And if we'd understand it right. We could get it right too.

GDP Miss Far Bigger Than Announced; Real GDP is 0% Using More Reasonable Deflator

The Advance estimate for Q1 GDP came in at 2.2%, down from 3.0% in the previous quarter, and below most mainstream media estimates of 2.5%.

However, my friend BC notes ....

The GDP deflator is reported to have averaged 1.2% annualized in the past 2 qtrs. Had the trend rate from '11 persisted, the deflator would have subtracted 2.6% annualized from real GDP, resulting in a 2-qtr. growth of real GDP of 0%. 

ECRI's Achuthan would appear correct that a recession were imminent instead of looking like a dummy.

Rick Davis at the Consumer Metric Institutes makes a similar calculation.

In their "advanced" estimate of the first quarter 2012 GDP, the Bureau of Economic Analysis (BEA) found that the annualized rate of U.S. domestic economic growth was 2.20%, down more than three-quarters of a percent from the fourth quarter of 2011. The vast bulk of the downturn was in commercial activities, with both fixed investments and inventories lowering the headline number substantially. Consumer spending on both goods and services improved slightly, and the ongoing contraction in governmental spending moderated somewhat. The BEA's bottom-line "real final sales" improved about a half-percent to an annualized growth rate of 1.61% -- hardly robust and certainly not the kind of numbers we would expect to see nearly three years into a recovery.

Once again the BEA has used "deflaters" that will strain the credibility of the public, especially if they buy gasoline. To correct the "nominal" data into "real" numbers the BEA assumed that the annualized inflation rate during 1Q-2012 was 1.54%. As a reminder, lower "deflaters" cause the reported "real" growth rates to increase -- and once again very low seasonally adjusted BEA inflation "deflaters" have been the headline number's best friend. If the raw "nominal" numbers were instead "deflated" by using the seasonally corrected CPI-U calculated by the Bureau of Labor Statistics (BLS) for the same time period, nearly the entire headline growth rate vanishes -- and the resulting growth rate would have been a minuscule 0.08% with "real final sales" contracting.

And real per capita disposable income actually shrank during the quarter shrank at an annualized -0.27% rate (from $32,699 per capita to $32,677 per capita) -- and it remains lower than it was 5 quarters ago. -- even using the BEA's optimistic "deflaters." Real-world households likely felt the pinch even more.

Doug Short at Advisor Perspectives has some interesting charts is his post GDP Q1 Advance Estimate Disappoints at 2.2%.

This chart shows the disturbing trends.

(Click on chart for sharper image)

GDP Trends

• Average growth since 1945 is 3.3%
• Linear regression says growth is trending lower at 2.1%
• Over the last 10 years, growth averages a mere 1.7%

Take a good look at the last decade. The US only managed 1.7% growth in the biggest housing boom in history followed by the biggest multi-trillion dollar global stimulus effort in world history.

Three years into a recovery, growth (if you believe preposterous deflators) is a mere 2.2% but only 0% if you don't.  Moreover, with parts of Europe in an outright depression, with even Germany and the UK in recession, and with China slowing significantly, the odds the US economy decouples for too much longer is now approaching zero.

I think the ECRI has its recession forecast reasonably correct. However, it may take a well-deserved GDP revision (likely after the next election) to prove it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Lehman was hardly taken by surprise no matter how large the tears. They were ready. They just hoped they wouldn't be the goats.

How Lehman Laid Low the House

Less than a year before the 2008 collapse of Lehman Bros. plunged the global economy into a terrifying free fall, the Wall Street firm awarded nearly $700 million to 50 of its highest-paid employees, according to internal documents reviewed by The Times.

The documents, which were among the millions of pages submitted in Lehman's bankruptcy, show the list of top earners each were pledged $8 million to $51 million in cash, stock and other compensation. How much, if any, of the stock was cashed in before the bankruptcy wiped out its value couldn't be determined.

Still, the rich pay packages for so many people raised eyebrows even among compensation experts and provided fresh evidence of the money-driven Wall Street culture that was blamed for triggering the financial crisis.

"Many people are going to be stunned at how well some people were being paid," said Brian Foley, an executive compensation expert in White Plains, N.Y. "This wasn't a matter of five or six people being paid a lot."

The documents were obtained by the government-appointed court receiver overseeing the firm's bankruptcy and were reviewed by The Times.

Lehman filed for Chapter 11 protection in September 2008 in what would become the largest bankruptcy in U.S. history, sparking the biggest financial meltdown since the Great Depression. The investment bank buckled after betting heavily on subprime mortgages to people with shaky credit, which became worthless as housing prices tumbled and the borrowers stopped paying their loans.

Before the fall, when housing prices were booming, mortgage-backed securities were one of the hottest investments on Wall Street. The ravenous appetite for these securities, and the rich commissions reaped by those selling them, encouraged the underwriting of ever-riskier loans that failed when the housing bubble popped, according to the federal Financial Crisis Inquiry Commission.

The Lehman documents provide a rare peek into Wall Street compensation practices, because federal regulations require salary disclosure of only the five highest-paid officers of a corporation. The documents reveal, to the dollar, the pay packages promised to individual traders and investment bankers at Lehman — a well-kept secret up to now.

The records illustrate that enormous pay wasn't limited to top executives but was dished out to a wide range of traders and others who sometimes took home even bigger paychecks than the CEOs who ran their companies.

The documents show total compensation but don't provide a breakdown of salary levels, stock or cash bonuses. The Lehman bankruptcy meant that most of the 50 executives on the list probably did not get their full stock-based compensation.

Lehman's richest pay package in 2007 went to Robert Millard, who was in line to make $51.3 million running a group that invested the firm's own cash, according to the documents. That topped the $40 million pledged to Lehman Chief Executive Richard Fuld. Millard's pay package in 2005 was $3.8 million before catapulting 1,084% to $44.5 million the following year, according to the documents.

Now running a hedge fund, Millard said he was never fully paid in 2006 and 2007. He said more than half of the compensation came in the form of stock, which was rendered worthless by the bankruptcy.

"Lehman Bros. lost a whole bunch of money doing other things," said Millard, who now leads New York-based Realm Partners.

Wall Street critics say the rich pay deals show how the short-term trading mentality had taken over the financial industry a few years ago.

"The numbers are shocking but consistent with the fact that in some ways Wall Street has been run as a casino for extracting money from the real economy and using it to pay extraordinary high levels of compensation — one might say obscenely high — to a small number of people," said Lisa Donner, executive director of the advocacy group Americans for Financial Reform.

Marvin Schwartz, a managing director in Lehman's asset management group, was second to Millard on the newly obtained list. He was allotted $31.1 million in 2007, $27 million in 2006, and $19.3 million in 2005, according to the documents. He is now a portfolio manager at investment firm Neuberger Berman.

Jonathan Hoffman, who worked at Lehman's global rates trading desk, was awarded a $30.9-million pay package in 2007, according to documents. He was promised $19.9 million in 2006 and $14.8 million a year earlier.

Schwartz and Hoffman declined to comment.

Also among the highest compensated was Mark A. Walsh, who made $70 million over three years running the firm's global real estate business. He was allotted a pay package of $17.5 million in 2007, according to the documents.

But the whole thing was a mistake.

An honest mistake, I tells ya!