Soybean GDP Report

The Soybean GDP report came out this morning showing 2.9% growth. I must correct my mistake yesterday where I said the median estimate was 2.9% because the media is reporting the median estimate was 2.5%, so it beat expectations. Looking at the report, there is a lot of weakness behind the great headline number. It’s similar to the smoke and mirrors report by Tesla which had a great headline, but was weak beyond that.

The first point I would like to make is the confusion I have when I research the data put out by the BEA. If you click on the Excel spreadsheet, it shows a data set which is labeled quarterly seasonal adjusted annual rates with the GDP in current dollars and the GDP in 2009 dollars. If you look at the current dollars row, the difference between the 2016 Q3 (18,651.2) and the 2015 Q3 (18,141.9) GDP, it is actually 2.8% not the 2.9% which is being reported by the media. I’m not sure why there is a discrepancy. If you know why, comment below. The GDP growth in 2009 dollars is just 1.5%, so it is more of the same weak economic data we have been getting in this recovery.

Besides the headline numbers not being as strong as the 2.9% touted by the media, the breakdown of the report is also weak. The personal consumption expenditures fell by almost half the growth rate in Q2. The consumer represents 70% of GDP, so this is a big deal. This report came out in tandem with the consumer sentiment report from the University of Michigan. The October report was 87.2 which fell from 91.2 in September and 90.0 from October 2015. If the consumer is weakening, this is bad timing because the holiday shopping season starts next month.


This weakness also correlates with the restaurant performance indicator which I have below. This index is a monthly composite that tracks the health and outlook for the U.S. restaurant industry. It fell to 99.6 in August from 100.6 in July. When the index falls below 100, it indicates contraction for key indicators. Only 30% of restaurant operators saw same store sales increase while 53% saw same store sales decline in August 2016 compared to August 2015. 21% of restaurants saw traffic increase while 59% saw a decline in the same period. These three indicators, all suggest the consumer is tightening its spending with is bad for future economic growth.


Another point of weakness in this report was fixed investment which fell for the 4th straight quarter. This has never happened outside of a recession. The chart below shows the historical fixed investment growth rate. The economy peaked in 2015 according to this and many other indicators.


The most dubious part of the GDP report was the effect soybean exports had on the report. Soybean exports grew because of a weak crop in Brazil and Argentina which are usually leaders in exporting soybeans at this time of year. The temporary increase in soybean exports to make up for the weak crops elsewhere added 0.9% to the GDP growth. If you take off this temporary blip, my 1.8% guess wouldn’t be as far off as it was. Because of the increase in soybean exports, seasonally adjusted food, feed, and beverage exports were up 121% quarter over quarter. Soybean exports accounted for $38 billion of the $119 chained dollar increase in GDP.


I was expecting the GDP report to come in worse than it did, but any economist who claims this report was great is basing that on the headline number and not the details. This report is more of the same mixed data we have been getting for the entire recovery. We took a step forward in terms of inventories and export which added 0.61% and 1.17% respectively to GDP. We then took a step back in terms of consumer spending and fixed investments. The soybean exports were a onetime benefit which means the real report was 2% growth which is a slight improvement from the 1.4% growth rate in Q2.

If the bulls were intellectually honest, they would wait to see another report before claiming the economy has turned around just like when they clamored to wait for another report after the past 3 reports were weak. I expect consumer spending to decrease over the next few quarters as the jobs picture finally rolls over. It is especially disconcerting to see consumer spending weaken before the labor market. Normally I would expect the labor market to cause consumer spending to decrease as anyone who gets fired will cut back their spending drastically. If someone you know gets fired, it also motivates you to cut back spending.

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