FOREX TRADERS

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Allen Iverson leaves Philly; The Philly Fed Index takes a beating. Correlation?
Posted 17:59 21 December 2006 by Big Pippin
http://www.babypips.com/blogs/pippinainteasy/allen_iverson_leaves_philly_th.html
Ok maybe not but the Philly Fed Index did drop to -4.3 compared to last month's index which was at 5.1. This was much lower than the expected 3.0 figure that was forecasted and shows that the manufacturing sector is still softening. Recall that the Empire index was relatively flat, and even though it's usually firmer than the Philly Index, this is a wider than normal difference between the 2 reports. However, if you look at the entire picture, it actually makes sense that the manufacturing sector is decreasing.

Real GDP in Q3 was revised down to 2.0% which was slightly lower than the 2.2% forecast. However, the more important rate of change to pay attention to is the year-over-year growth. Year-over-year growth for real GDP is 3.0% in Q3 compared to 3.5% in Q2. So what does all that mean? Well if you take a look at a what the year-over-year rate of growth has been for GDP over the past few months, you'll see that it is declining. Remember, GDP is the broadest measure of our economic health and if we see that GDP is dropping, it should raise some red flags!

Now let's break this down even further. What makes up roughly 2/3 of GDP? If you guessed consumer spending, then you are absolutely correct! So if GDP is dropping, that means a big reason is because consumer spending is dropping. If consumers stop spending, then businesses stop producing, and there lies the culprit for weaker manufacturing reports. Expect to also see weaker Industrial Production and ISM manufacturing reports in the next few weeks.

I still think consumer spending is going to spike up because of the holidays which will in effect, temporarily increase GDP and industrial production but the long term trend looks weak and if year-over-year GDP growth ever slips below 2.5%, the economy will be in deep "doo-doo".