Are We, Or Aren't We...

... in a recession?

No one truly knows, although many have an opinion, and depending on political stripe... we either are or we aren't. And it is always because something is a clear sign. Never mind, those government stats containing revisions from previous months, it must be deemed as absolute. 

Then there are the BIG money folks, that have gotten rich off QE and want those glory days to return... meaning the FED to reverse policy. BIG money really needs there to be a recession for that to happen and will lobby long and hard, that we are already in a recession and are betting on the FED to ease off rate hikes, etc. 

GDP gets revised a couple of times and then is revised once a year thereafter. 

Yep... revised from a negative in June 2015, to a positive in one month after third release and by 2021, was downright stellar.

Citing GDP as some guarantee, one way or the other... is based on something likely to be revised. Besides, it might just be possible that the 3rd quarter of this year could be positive. Would that mean the recession is over?

Employment situation... the word revised is used 4 times in the latest report. This month...

The change in total nonfarm payroll employment for May was revised up by 2,000, from

+384,000 to +386,000 https://www.bls.gov/news.release/archives/empsit_08052022.htm

The previous month...

The change in total nonfarm payroll employment for April was revised down by 68,000, from +436,000 to +368,000, and the change for May was revised down by 6,000, from +390,000 to +384,000 https://www.bls.gov/news.release/archives/empsit_07082022.htm

Which is it? 

My goal is not to cast doubt on government reports, but putting my heart and soul into a specific set of data as gospel... is just plain foolish, in my opinion. 

Earlier I mentioned the possibility of a 3rd QTR GDP print being positive. I base that on the blowout of trade balance and how it impacted the 1st two Quarters.

The trade deficit started blowing out in 3rd Qtr. 2020 and then accelerated, with another major drop down in the 1st Qtr, and barely easing the 2nd Qtr. That would be the period when our business leaders went nuts with over ordering. That may ease back a bit going forward. 

In an alternate universe, where the trade imbalance did not drop so dramatically, the 1st Qtr. GDP would have been +2.3% and 2nd Qtr. at +1.6%

Of course on the potential negative side is the extreme jump in credit. I have no idea how much longer that can last, but with the Federal Reserve ready to push up rates further... something's got to give, in my opinion. BUT, that set of data might likely also be revised. 

There is an old adage of "When your neighbor is out of a job... it's a recession. When you're out of a job... it's a depression". Probably the most accurate of all metrics!

Now for MY opinion. We are not in a recession yet. We may soon be, but the severity is unknown, until we are actually in the middle of it. I would say that any looming recession in the U.S. will be exacerbated by the current economic morass of Europe. 

I am trying to get a grasp on why Germany's trade balance is narrowing, when the Euro is cheaper now than 1 year ago. Is it difficulty in obtaining necessary materials to manufacture items? Is it the high cost of Natural Gas that is offsetting any gains from the weak Euro? Is it a combination of both, or several other factors. 

I don't know, but do worry about the impacts on Europe as a whole, which would include the U.K. in this instance. The natural gas issue, will not go away anytime soon, in my opinion. The materials issues are likely not to go away anytime soon, as well. 

This appears to be a very challenging time for Western Civilization. 

We seem to have a situation where many folks are being duped by big money into believing we are already in a recession, which could cause a recession via lack of confidence. Be careful what you wish for. 

Of course, we also have folks in the U.S. eagerly anticipating and repeating statements of a C.O.L.A. being above 10.5% or more, without considering how much additional inflation is required to get us to that level. But then, the point might be to inflate expectations and then cry foul, when it doesn't happen. Be careful what you wish for.

Another Government Release on Inflation for October, 2021

For October, we've had the C-CPI-U, CPI-W, CPI-U, R-CPI-E, Median CPI-U, PPI Final, PPI Intermediate. Confused? Maybe that's the point!

Now it's time for the PCE, PCE sans Food and Energy, and Trimmed Mean PCE, to round out the inflation reports for October.

The Forecast... PCE 5.08% and the Core PCE at 4.09%.

The Result... PCE 5% and the Core PCE at 4.1%. Oh, and the Trimmed Mean PCE is at 2.6%.

The monthly PCE was forecast at 0.7% and the core at 0.44%. Result was 0.6% and 0.4% for Core.

What does any of this mean? Frankly, I am only concerned about My Price Index and the direction it might be headed, and right now that direction is upward. 

So naturally, I am interested in the FED decisions to raise interest rates to slow inflation. But which rate of inflation is being watched. I know everyone has their own belief and the FED is theoretically supposed to keep inflation near the 2% level. But again, which rate, is it core... or is it trimmed.

A bit of history about the 2% target. It is not set in stone. For most of the past decade the debate has been about raising that targeted rate. Google it, as there are many articles regarding this matter. 

To the matter at hand... the FED has adopted an average of 2% and to make up for past "low" inflation...

By adopting average inflation targeting, the Fed is communicating that 2 percent is not a ceiling for inflation and that it may let inflation exceed 2 percent modestly and temporarily to make up for past low inflation. The key aim of this policy shift is anchoring inflation expectations. 

Just how long is that timeline and which inflation method is being used?

I would say the FED is in between a rock and a hard place, but I think the more accurate description is as follows...

Image a silk table cloth on a table. Atop that table cloth a house of cards has been built. Now you must remove that silk table cloth... without bringing down that house of cards.

What does that mean? I still have an imagination at my ripe old age.

Other stats from this morning (monthly, not adjusted for inflation).

• Advance Durable Goods... -0.5%
• Advance Wholesale Inventories... +2.2%
• Advance Retail Inventories... 0.1%

 

CPI for October, 2021

Holy Toledo!!! And other places as well. The CPI-U came in at a staggering 6.2% YOY, well above anybody's expectations. Although given yesterday's PPI, the expectations should have been revised upward. 

There were no hints of slowdown in nearly any category, with maybe the medical category, which has been rather benign over the past 12 months. I cannot accept that as being a long term trend, no matter how much I wish it were true. 

Even my own personal household cpi rate, woke me up. While not in the same impact as the CPI-U, it was 

4.16%, with the monthly increase similar to the CPI-U.

Realistically, my being under the CPI-U is largely due to hoarding prior to the referenced timeframe and subsequent easing of quantities. Seriously, there are only so many cans of pork and beans that a person can eat in a lifetime. (Unlike the annual revision of various weighting of items, I revise monthly.)

The Real Earnings report was also released. While it is oft cited that wage increases are inflationary, it should be pointed out that current wage increases are a result of previous inflation.

Real Hourly earnings based in 1982~1984 dollars, fell this past month, as did a dip in hours worked, which translates into even steeper weekly earnings drop. 

With both Producer prices at the final and intermediate demand levels still rising, it is hard to foresee any glimpse of peaking anytime soon. Then there is the importation of inflation. We are a net importer and inflation is ramping up among our trading partners. 

Most notably would be China, where producer price inflation is north of 10%, but where the Government is forcing producers to hold the line to keep Chinese consumers in the 1% inflation range. 

How could these companies survive in such a climate? Cranking up prices well beyond 10% for foreign customers.  Some of that is likely a part of the intermediate demand increases, which are not tapering at this time. 

The forecast for November is 6.6%~6.9%. October was 6.2% compared to a 5.7%~5.9% expectation. For the record, 6.6% would be the highest since June, 1982.

Then there is some theoretical relief from the Federal Reserve, with an interest rate increase to slow inflation. The FED looks that the CORE inflation and not the core CPI-U from the BLS, but rather the Core of the PCE, from the BEA. 

The FED has frequently cited the need to establish this Core at 2%... over a period of time. Not real sure what the timeline would be, but the past 5 years has shown a 2.11% annual rise. Yet the thinking is the FED action will not happen until next summer. 

The problem is the FED is stuck between a rock and a hard place. When that theoretical raise occurs, the capital/financial markets could be damaged. 

In my opinion, the FED keeps talking up transitory, while hoping the consumer finally capitulates on spending due... to inflation. They can then claim they were right all along.

It is so difficult to remain optimistic.