Japan's GDP Shrinks At Annual Pace Of 12.7% in Q4 2008

Well the headline pretty much sums it up. What is becoming more frightening to me is that I have yet to see how Q1 2009 will be any better. The global economy is in free fall. I know I will hear arguments about the Baltic Freight Index, copper prices and any oil other than WTI as proof we have seen bottom and fiscal stimulus is working. My point is that the Western World consumer has shut down. Without the consumer consuming unemployment will continue to rise. I know the consensus is for around 9% unemployment by the end of 2009. This is understated in the current environment. This is where we differ. Not in direction but in magnitude.

If we dig into the GDP data from 2002 - 2006 we see that the majority of consumer spending was aided by withdrawing equity from the home. Hey I'm not here to criticize this as my family has done this as well. But reality is that when we purchase with debt we are saying I will consume now and pay later. The pay later portion takes future cash flow and applies it to paying down debt - not consuming. In other words the consumer portion of GDP is going to collapse. Again nothing new. My argument is that the magnitude will shock everyone.

I'm sure you all caught the headline on Thursday that consumer spending increased 1% in January. Both the buy and sell side "believers" continue to tought how the worst is behind us and that the back half of the year will be rosy. Don't be fooled. They all fail to mention some key facts: first is one month does not change a trend. If you look at YoY changes consumer spending is off 10.6% from January 2008. This changes ones perspective just a little. How about the 3-month change (November - January) of -9.5% (+-.5%) from the same period a year ago. Now the 1% increase doesn't look so good. But the kicker is that the rate of change appears to be accelerating. January sales are 2% below Q4 2008. This doesn't seem positive to me.