U.S. Data Fluke Exaggerated Growth, Will Be Reversed
By Carlos Torres
Oct. 27 (Bloomberg) -- An unexpected increase in auto production last quarter was a statistical fluke that will be reversed, making current U.S. economic growth even weaker, according to a former Commerce Department economist.
Last quarter's annualized 26 percent increase in motor vehicle production shocked Joe Carson, now director of economic research at AllianceBernstein LP in New York. Without the gain, the economy would have grown at an annual rate of 0.9 percent, not the 1.6 percent the Commerce Department reported today.
The reported increase in output came despite cutbacks announced by General Motors Corp., Ford Motor Co. and others. A drop in the wholesale price of SUVs and light trucks as the automakers cleared leftover 2006 models made production look stronger than it actually was, said Carson. The economic fallout from the auto-industry cutbacks will instead come this quarter, he said.
``Last quarter was weak even with the benefit of this mismatch and the fourth quarter will now also be weak because it's going the other way,'' Carson said. ``Whatever output you have this quarter, which will probably be down, will be discounted by a likely rebound in prices.''
Carson stressed that there wasn't an error in procedure requiring a correction from the government. It's the way the Commerce Department always computes the data and doesn't mean the statisticians committed any mistakes, he said.
Adjusting For Prices
The mismatch can be explained by looking at how the government adjusts the figures for price changes.
Commerce Department economists use wholesale light truck prices, from the Labor Department's producer price report, to eliminate the influence of inflation on investment and inventories for that category. A 5.5 percent drop in price of SUVs and other light trucks last quarter made output look stronger when adjusted for inflation, Carson said.
Declines in shipments of vehicles and parts from the Commerce Department's durable goods report over the last three months and in the Federal Reserve's output numbers in its industrial production figures, reinforce forecasts that the fourth-quarter growth numbers will show the auto cutbacks, Carson said.
Growth Pessimism
Carson currently forecasts the U.S. economy will grow at an annual rate of 1.4 percent this quarter and said he wouldn't be surprised if growth came in at half that pace. AllianceBernstein is an asset management firm.
The median forecast of economists surveyed by Bloomberg News earlier this month was for fourth-quarter growth of 2.5 percent.
``We are looking into it to see if we can better understand the reasons for the large decline'' in prices, said Brent Moulton, associate director for national economic accounts at the Bureau of Economic Analysis, part of the Commerce Department, which produces the report on gross domestic product.
Carson wasn't the only economist shocked by the auto- production figures.
Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, called the numbers ``the most unbelievable detail'' in the GDP report. Stanley didn't lower his estimate for fourth-quarter growth because, while auto production will probably drop next quarter, other areas such as investment in aircraft and defense spending will probably rebound, he said.
The surprise for Stanley wasn't in the price component. It was that even before adjusting for inflation, the figures showed an increase that doesn't jibe with the numbers from the manufacturers, he said.
Composition of Growth
The composition of growth last quarter, which included an unexpectedly large accumulation of inventories, also prompted other economists to reduce estimates for fourth-quarter growth. An increase in inventories overall suggests manufacturers may need to trim production this quarter.
The economy will probably grow at an annual pace of 1 percent from October through December, down almost a full percentage point from his earlier estimate, according to Joseph LaVorgna, chief U.S. fixed income economist at Deutsche Bank Securities Inc. in New York.
``A relatively large inventory build last quarter will need to be worked off and that will produce a negative hit to production, employment and income,'' LaVorgna added.
Ford, the second-biggest U.S. automaker, said car and light truck sales dropped 17 percent last quarter compared with the same period last year. The Dearborn, Michigan-based company cut third-quarter production by 11 percent, and plans to slash output by 21 percent this quarter.
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