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.

GDP, PCE, Income and Outlays, Inflation Summary and July Wrap-up!

 

The real GDP for the 2nd Quarter was released and it was below forecasts. I think it was generally in the 0.8% annualized. My pathetic attempt was 0.6% annualized. The result was -0.9%. The pundits have fixated on the falling inventories, but I noticed the imports/exports did not match expectations. 

The consumer was steadfast in increasing spending, but slowly. (Did I mention real GDP is after adjusting for inflation?)

Here is a bit of history for consumer spending relative to real GDP.

And this is fun with numbers, which is consumer spending after taking out a major contributor or detriment to GDP. I'll let you guess what that is.

While the consumer edged up, and some gains in net export, Gross Private Domestic Investment was the big drag, it was the inventory numbers that pulled it down by $107B from last quarter. That was the surprise for many people and the difference between the result and what was forecast. 

Then we have Personal Income and Outlays, which...

Personal income increased $133.5 billion (0.6 percent) in June, according to estimates released today by the Bureau of Economic Analysis (tables 3 and 5). Disposable personal income (DPI) increased $120.4 billion (0.7 percent) and personal consumption expenditures (PCE) increased $181.1 billion (1.1 percent).

The PCE price index increased 1.0 percent. Excluding food and energy, the PCE price index increased 0.6 percent (table 9). Real DPI decreased 0.3 percent in June and real PCE increased 0.1 percent; goods increased 0.1 percent and services increased 0.1 percent (tables 5 and 7). (emphasis added)

Even with disposable income sliding after inflation adjustments, the consumption increased after inflation adjustments. Borrowing?

Then the various inflation numbers...

Not much to be enthusiastic about. It would appear that some of the forecasts are starting to downgrade inflation number for July and I would tend to agree. At best it would seem to have peaked. 

As to whether we are in a recession or not... the idea of "technical" recession is an imported idea. The U.S. has never jumped on the 2 quarter as recession bandwagon. Harken back to the Great Recession. It was deemed the U.S. started into recession in December 2007, yet we did not have back to back negative GDP, until 3rd and 4th quarter 2008.

I would think we are likely heading into a recession, but not at the moment. Then the issue is how long and how deep? 

So good luck and on to next month's data. 

End of the Month... June 2022

Okay, it is the end of June. Time for a recap of data published this month for May by the really smart guys, with comments by a really dumb person (me).

First up is the various inflation gauges...

(Note that I have estimated the Eurostat for the USA, as the official data has not been published.)

Not much relief in the inflation outlook, although demand destruction is becoming evident in certain core areas. Even gasoline and diesel usage seems to be tapering off. Prices maybe not so much... but exports are still outweighing imports.

The personal income and outlays suggest a reason for this. (click to enlarge)

Is it a one month anomaly or the start of a trend? It's possible the old adage of not being able to get blood from a turnip... may be in play.

Now on to GDP. Which slid from -1.5% to 1.6%, and the headlines are about consumer spending decreasing from +3.1% in the 2nd reading and now at +1.8%. It's the consumers fault!! The consumers still remained positive in expenditures and overall GDP fell. Aren't we overlooking that 800lb. Gorilla?

I can remember when the consumers were 60% of the economy; then 65%; then 2/3's; and now 70%. That 70% gets stated as something normal, which it isn't...

That's since early in the 80's, so what might have changed? Let me back out some numbers and see what it might look like in "fun with numbers". (You can guess what I backed out)!

The line edges up in "fun with numbers", but not like the first graph. We can't speak of that, as it is politically sensitive. The bottom line... we did this to ourselves.

I can't really say whether the 2nd Qtr. GDP will be better or worse, but 2nd quarter is over with today, so it is only a matter of waiting for the 1st read at end of July. Frankly, I think it will be positive for 2nd quarter, but the ship is starting to tilt, in my opinion. 

I can distinctly remember discussion of whether or not we were in a recession in spring 2008. I am not sure when the decision was finally made of it starting in December of 2007. It seems it was given that date after the recession "ended" in June of 2009. 

So we won't officially know whether we are in a recession, until it is over, or when the fat lady sings.  

End of the Month... April 2022 PCE, 2nd est. GDP, and Other Stuff.

 

The final results for April data is now in and it looks like a mixed bag. Sure the headline numbers are indicating deceleration of inflation, but there are still problem areas. The most important being my price index, which is increasing. I have highlighted some areas of acceleration of inflation. 

Remember that energy was flat for April and has risen in May, which comes out next month. The deceleration of inflation in overall CPI indicates a potential repeat of the April headline number. The core, which is without food and energy, indicates some moderation. We'll just have to wait. 

The Personal Income and Outlays for April came out and it isn't stellar in my opinion. Personal consumption expenditures were up 0.7% for the inflation adjusted month to month. The disposable personal income was flat on the inflation adjusted month to month. Credit cards anyone?

Somehow the concept of driving 120 mph on an ice covered road comes to mind, with a slight decrease in overall speed. Then the FED is slightly tapping the brakes. What could go wrong?

In other news, the 2nd release of the 1st Quarter GDP indicated a bit less than the Advance. I have read some comments about a potential negative 2nd quarter as meaning we are in a recession. WRONG! It is just a symptom. 2020 saw two quarters and no recession, as discussed by the gurus of such stuff. After debating most of 2008, it was finally decided that December of 2007, was the start of the great recession. The first back to back negative quarters were 3rd and 4th Quarter of 2008. So clearly more information than GDP numbers are a factor.

As for the 2nd quarter GDP, which will not be released until end of July... there is ample reason to believe it will not be negative. The trade numbers were a major hit to the 1st quarter GDP. The dollar has strengthened, which should reduce the deficit numbers, the inventory builds should be increasing, which is a plus for GDP, although troubling. The trade deficit should also be waning, due to a potential China slowdown.

So a positive number for GDP 2nd Quarter is in the offing... but that does not mean the economy is doing peachy keen. That expected positive inventory gain, could be a sign of demand destruction. With energy prices taking a bite out of disposable income, consumers will likely dial back in other areas.

So the outlook is a mixed bag in my opinion. A mixed bag is better than all negative, so there is some room for optimism. 

Have a good holiday!!

Positive Spins?

Yesterday gave us the initial 3rd qtr. GDP reading from the BEA, and while it was far below original expectations, it could be explained away as an anomaly, due to the obvious drop in goods, maybe from reduced car sales, supply chain disruptions, etc. Meaning not all is lost for the 4th qtr.

Today gives us the Bureau and Labor Statistics release of Employment Cost Index Summary. It was good news for wages since 3 months ago, with wages up 1.5%, compared to about 1% in inflation (BLS CPI). Year over year is still lagging as wages are 4.2% over last year, while inflation is 5.4% (BLS CPI) over the same period. 

It could be stated with reasonable certainty that wages are on the uptick and outpacing inflation. They will need to keep a healthy rise, as forecast for October inflation results is in the 5.7%~5.8% range. Not sure if rising wages can keep up with that pace, as the producers are pushing the additional cost downstream. That was reflected in last month's PPI report from the BLS.

Then there is the matter of the BEA's Personal Income and Outlays, September 2021. The troubling number would be the inflation adjusted disposable personal income drop of -1.6% in one month (current dollars). This is explained away as a decrease in government social benefits. This as personal income also dropped -1.0% in one month, also in current dollars. 

Personal consumption expenditures slowed from the August increase of 0.6% (chained dollars) to September's 0.3% (chained dollars).

It is that inflation adjusted -1.6% drop in disposable income that should be concerning going forward. How does that translate to continued goods and services improvement? It should be noted that a large part of the GDP improvement has been borne by the consumer, with their pct. of total GDP rising during the past 6 quarters. 

I guess time will tell, but attempts to put a positive spin on all of this will just have to wait. 

Things Looking Up... Maybe!

The Census Bureau just released the ADVANCE MONTHLY SALES FOR RETAIL AND FOOD SERVICES, SEPTEMBER 2021.

Last Month, I stated the little upswing in inflation adjusted numbers were not a trend. We have back to back rises, so maybe... just maybe a trend is starting to form.

Of course we had a 5 month trend from May 2020 until August 2020, before tapering off. Sometimes year over year spending is seasonal, so September is an improvement over last year. On the other hand, a couple of months uptick going into the winter months does not a booming economy make. In fact the indicators for 3rd qtr. GDP are trending downward... rather sharply, imo. 

Consumer spending has altered so much the past 19 months (yes, it has been that long), the predictability is a stab in the dark. Just how many cars, freezers, refrigerators, TVs, etc. can be purchased until the consumer's desires are satiated? How full do the pantries become, as well. At what point does inflation quell the consumer's appetite?  Is inflation encouraging spending... to get that desirable item, before the price goes up? How much forward purchasing is due to the "supply chain?"

According to the GDP, the consumer is spending 18% more (inflation adjusted) on goods since end of 2020. Of that 28.9% more on durable goods; 12.2% more on non durable goods; 3.4% LESS on services. All of which are outside normal expectations.

A thought exercise... AA store in normal times sold about 10 freezers per month and could replace those within two months. There is 20 in the pipeline and the store pays as they are delivered. Just in time. 

Due to covid, the hoarders started buying 20 freezers per month and due to the supply chain congestion, the delivery time is 6 months. AA store now has 120 freezers in the pipeline, with payment due on delivery. 

The consumer reverts to normal... AA store cancels orders for the next 10 months, but still has to pay for those 120 freezers as they are delivered. By the end of 6 months, the supply on hand is 60 in the warehouse, that have been paid for AND the supply chain has been resolved. Far fetched, but this is exactly GM's problem circa 2009.

This is a very hard landing scenario with the freezer manufacture laying off people for long periods, the store dropping prices... in an attempt to stay afloat with operating expenses, etc. These things make the consumer very edgy and resistant to spending what money they have on hand and/or going deeper in debt. 

The question becomes... how to avoid a hard landing? If I am smart enough to consider this... you can bet the FED is thinking of it as well. Raising interest rates to quell inflation that may very well BE transitory, could upset the apple cart. 

I think that is referred to as "caught between a rock and a hard place".

Interesting times.