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A Third Quarter of Negative GDP is Now Highly Likely

August 17, 2022

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5:47 pm

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51 comments

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Economics

GDPNow data from Atlanta Fed, chart by Mish.

Please consider the latest GDPNow Estimate for third-quarter 2022 GDP.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 1.6 percent on August 17, down from 1.8 percent on August 16. After this morning’s retail sales report from the US Census Bureau, the nowcast of third-quarter real personal consumption expenditures growth decreased from 2.7 percent to 2.4 percent.

Base Forecast vs Real Final Sales

The real final sales (RFS) number is the one to watch, not baseline GDP.

RFS ignores changes in inventories which net to zero over time. This is a good reason to ignore the talk of two quarters of declining GDP being a recession.

RFS in the second quarter was positive but retail sales plunged in May after a strong April. That’s when housing started to crumble as well.

GDPNow Jumps on Jobs Data

On August 10, I commented GDPNow Third-Quarter Forecast Jumps to 2.5 Percent, Recession Off?

Models Don’t Think

Models don’t think. Humans can, perhaps incorrectly.

The baseline job numbers do not match 200,000 layoffs at Amazon, consumer sentiment, rising jobless claims (albeit from record low levels), warnings from retailers including Walmart and Target, layoffs at Walmart, and two warnings from Micron on demand for computer chips.

I smell huge revisions to the job numbers. If so, this forecast jump will be short lived.

There are three retail sales reports coming and a myriad of housing reports. Those will hold the key to the third quarter, not the July jobs report.

Recession Territory

At +1.9 percent on RFS, we are not in recession territory.

But it’s not where estimates are now. It’s where the final data ends up at the end of September.

The economic reports, other than the July jobs surprise, have all been where I expected, not where the market or GDPNow expected.

Housing Starts Drop 9.6 Percent, Now Below Pre-Pandemic Level, Led By Single Family

Yesterday, I commented Housing Starts Drop 9.6 Percent, Now Below Pre-Pandemic Level, Led By Single Family

No Growth in Retail Spending, Missing Expectations, Negative Revisions

Today, I noted No Growth in Retail Spending, Missing Expectations, Negative Revisions

Looking Ahead

Looking ahead, housing rates to be miserable and durable goods (appliances, furniture, cabinets, etc.) miserable along with housing.

We are one revision away in jobs for a huge plunge in these estimates.

Regardless, I expect the rest of the quarter to be very weak even if the July Jobs report is accurate.

The economic trend is down, and GDPNow has a big history of high early estimates that sink as the quarter progresses.

1.6 percent is not a big cushion, with over two-thirds of the data for the quarter still to be seen.

Housing Bust and Cyclicals the Recession Key

In case you missed it, please see Cyclical Components of GDP, the Most Important Chart in Macro

Also see A Big Housing Bust is the Key to Understanding This Recession

If the data follows the path I expect, we will have a third quarter of negative GDP with real final sales falling since May.

This post originated on MishTalk.Com.

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51 Comments

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Oldest Most Voted

kewtiepie

3 years ago

It’s too bad that you have a gambling addiction and a social media addiction because it takes you away from your family and it gives you that fake dopamine high that you crave so badly. And then because your life isn’t fulfilling, you get distracted by screenshots of female body parts that you fantasize about and you imagine your readers fantasize about also. You might want to check yourself before you wreck yourself mish

JRM

3 years ago

So MISH is all in changing the definition of a recession???

Just a few years ago, it was 3 QT negative was we were in a recession..

To me that’s how they played footsies, of when we were in a recession..

One QT negative, next QT .01, next QT negative—“We are not in a recession” would be the headline, but then within 2 QT they would revise the up, down!!!

Bam_Man

3 years ago

The Biden “Brain Trust” will have to think up another word salad to mean “three straight quarters of negative GDP is not a recession”.

Salmo Trutta

3 years ago

Given an injection of
new money, it takes 24 months for inflation to recede from its initial impact (provided the FED doesn’t
“cave in”). Given that the roc in real output is 10 months, a deceleration in
money flows impacts R-gDp more so than inflation. That’s how you get a
recession. It’s just math.

RonJ

3 years ago

Reply to Salmo Trutta

(provided the FED doesn’t
“cave in”).

That is the 64 trillion dollar question. Will they or won’t they?

Captain Ahab

3 years ago

Reply to Salmo Trutta

What happens when you pour trillions and trillions into the sewer over 14 years…. oops system?

Lisa_Hooker

3 years ago

Reply to Captain Ahab

Given an injection of
new money, it takes 24 months for inflation to accelerate even higher from its current baseline.

RonJ

3 years ago

“Models don’t think. Humans can, perhaps incorrectly.”

Humans can create false narratives.

Casual_Observer2020

3 years ago

Truly bizarre climate age we have entered. A normal summer where I live is sunny and dry and highs in the high 90s. Today it was cloudy all day , 102 degrees with no rain or humidity to speak of. We’ve had multiple cloudy days this summer with Temps in the 100s. One week in the summer the forecast was in the 100s and the temperature didn’t break 80 because of clouds that seemingly didn’t want to move. The forecasters appear to be more clueless than ever.

Captain Ahab

3 years ago

Reply to Casual_Observer2020

So, you’re saying you live where the sun don’t shine?

Pepe.Le.Pede

3 years ago

Reply to Casual_Observer2020

Never heard of geo-engineering huh? HAARP?

shamrock

3 years ago

The 1st 2 quarters GDP were only negative because of massively high inflation deflators. 3rd quarter deflator is going to be very low, probably less than 2%. Real growth will very likely be positive.

JackWebb

3 years ago

Reply to shamrock

The numbers are against you. Inflation ran at 5%-5.4% from May 21 through Sept 21. Didn’t really accelerate until 4Q21. The year-over-year comps won’t get better until at least October and probably later.

https://www.usinflationcalculator.com/inflation/current-inflation-rates/

But have no fear. The Eastern media will say that the economy has to decline for three years in a row before it’s a recession.

JackWebb

3 years ago

Reply to JackWebb

If you look further, you’ll see that 1Q22 over 1Q21 showed less inflation than 2Q22 over 2Q21, even though it was a harder comparable. The 3Q22 over 3Q21 comp will be very close to 2Q/2Q.

shamrock

3 years ago

Reply to JackWebb

That’s all well and good, but for quarterly GDP the deflator uses quarter over quarter inflation, not year over year. July was 0%, August will be similar.

JackWebb

3 years ago

Reply to shamrock

You will see.

Christoball

3 years ago

Reply to shamrock

No matter what the month over month is or quarter over quarter is you and businesses are still paying 10% + more for everything compared to last year. Gasoline prices are the only falling cost as far as I can see and as my Dad always said “gas is the cheapest thing you put in a car.”

Mish

3 years ago

Reply to shamrock

I will take the over on 0% for August

And by the way retail sales were 0% in July. No contribution to GDP even if GDP deflator is 0. It won’t be and it will not be negative either.

Captain Ahab

3 years ago

Reply to JackWebb

Something tells me inflation is now in the labor market… When have we seen that before?

Lisa_Hooker

3 years ago

Reply to Captain Ahab

Well, it was really great in the 70’s when the big labor unions got multiyear COLA pay raises written into their contracts that lasted until the end of the decade.

worleyeoe

3 years ago

Reply to JackWebb

Q1 & 2 of 2022 where negative because of the pull back in corporate purchasing. Companies thought COVID was going to keep the consumer at home just buying a bunch of things they didn’t need. Well, that shifted to services which are still flying pretty dog gone high. Q1 when from -1.6 to -.9 in Q2. There’s no way GDP at least doesn’t come in negative towards zero. The more likely case is a positive sub 1% expansion. From there, GDP growth will stay sluggish (i.e., around 1% growth) through Q4 calendar 2022. It’s early next year when things get dicey.

Do mortgage rates fall enough to stabilize housing? Does the price of oil stay below $100 a barrel through the winter? How much does NG & heating oils cost this winter when most everyone who had a low fixed rate last winter resets to something like myself that’s nearly 2x higher? Is there a pickup in the unemployment rate? We’re four months into much higher rates than the first of the year. As of June, the YoY increase in prices was 17.3%. There’s quite a bit of sliding downhill that still has to occur in order for housing to spur an uptick in unemployment.

Personally, I don’t think anyone can make a valid prediction if or when unemployment will start to increase. A soft landing, by definition, means minimal job losses. I for one think the current labor market is going to remain somewhat resilient through the end of the year. The longer it stays resilient, the greater the chances are there’s a soft landing.

JackWebb

3 years ago

Reply to worleyeoe

Anyone who thinks they will predict oil prices is a moron, unless they are a genius that will never post anything here. The labor market has been distorted by the stim checks. Stay tuned on that one.

PapaDave

3 years ago

Reply to JackWebb

That depends on what you mean. Predicting day to day moves is impossible. Predicting accurate prices (like 92.55) is silly. And since the financial market for oil is 50 times the size of the physical market, sentiment and expectations play a big part in the short term price fluctuations.

One must simply accept that these wild fluctuations will occur and try to take advantage of them. Which is why I day trade and swing trade.

But in the long run, the physical market is what truly matters. Which means following supply, demand and inventory balances. Demand has been exceeding supply for two years now and inventories continue to drop. Which means upward pressure on prices. Which is exactly what has happened for the last two years.

I still expect oil to average “around” $100/bbl throughout 2022 and 2023 because of the pressure. Though oil companies will do fantastic at any price over $80.

JRM

3 years ago

Reply to PapaDave

Yep I’m betting just a few years ago you thought Crude was going to $10 a barrel before it bottomed around $50 and then started slowly climbing again??

I remember a lot of predictors online and MSM were saying that!!!!

PapaDave

3 years ago

Reply to JRM

The price of oil wasn’t even on my radar screen 3 years ago. I was mostly into tech companies back then. And they did very well for me.

Then, around 2 years ago I discovered this blog during my quest for more investment ideas. There were two commenters, Realist and Eddie, who were both talking about the great investment scenario for oil for the rest of this decade. It made sense to me, so I sold my tech (a little early, but glad I did), researched the companies they were mentioning, and bought a lot of those oil companies over a 2-3 month timeframe.

It’s all worked out great and I expect those investments to continue to do very well for the next several years.

What are you invested in?

And where do you get your investment ideas?

PapaDave

3 years ago

Reply to JRM

I believe oil actually went negative a little over two years ago. So it “bottomed” below zero, not at $50.

But that was before I started paying attention to oil and this blog.

Captain Ahab

3 years ago

Reply to JackWebb

This ‘moron’ ‘predicts’ oil will continue to cycle up and down, along a long term trend based on global population growth and income growth, with adjustment for depletion of total reserves. We will likely see a few (uncertain) events on the way.

Regarding tomorrow’s opening oil price, in terms of probability, it will most likely be close to today’s price at the close.

worleyeoe

3 years ago

Reply to JackWebb

Easy big boy, I was asking the question, not making a prediction about oil prices.

JackWebb

3 years ago

Look for another revision of the definition of “recession.” Really.

PapaDave

3 years ago

Still seems like slow growth to me in 22 and 23. Maybe slightly negative in a couple of quarters. And still expecting energy demand to grow during the mild slowdown, like it usually does.

worleyeoe

3 years ago

Mish,

Get back to us on 9/30. Looking forward to the post. We shall see. I call nada. I can definitely see it at or below 1%, but I’m not convinced another quarter of negative growth is in the cards. But, let’s say it does show negative .5% growth. That’s an overall improvement over the three quarters, so it’s still nothing to get hung up about. Now it there’s a rash of mass layoffs announced between now & 9/30, then we might want to pucker up.

Thanks!

Mish

3 years ago

Reply to worleyeoe

Expect weak GDP for a year forward, not necessarily negative

Tony Bennett

3 years ago

“The baseline job numbers do not match 200,000 layoffs at Amazon”

…

Something I have been thinking about for a while, yet seen no one else broach. UE Initial claims. Yes, followed closely by many. Low, but rising.

BUT consider. When virus hit Spring of 2020 > 20 million people lost their jobs and on some sort of government assistance. Many were slow to return to work *cough* extra $600 / $300 week in Federal benefits to State compensation *cough* … and did not start looking / getting a job to late 2021 / early 2022. Figuring LIFO (last hired first laid off) employment. They would NOT be eligible for UE compensation … and fall through the cracks … and not be counted:

Each state sets its own unemployment insurance benefits eligibility guidelines, but you usually qualify if you:

Meet work and wage requirements. You must meet your state’s requirements for wages earned or time worked during an established period of time referred to as a “base period.” (In most states, this is usually the first four out of the last five completed calendar quarters before the time that your claim is filed.)

https://www.dol.gov/general/topic/unemployment-insurance

vanderlyn

3 years ago

Reply to Tony Bennett

WHEN in doubt i always refer to shadow stats for all econ numbers counted as best anyone could do.

JRM

3 years ago

Reply to Tony Bennett

It seems now that MISH no longer follows the U-6 numbers??

That’s the closer to what the real unemployment numbers are, even though I believe its too low!!!

According to the labor dept June (not seasonally adjusted) 7.0 —July 7.2

June (seasonally adjusted) 6.7 —July 6.7

So the front page news on jobs is phony!!!!!

vanderlyn

3 years ago

Reply to JRM

indeed. u6 high unemployment already. and using shadow stats benchmarking to 1994 counting convention we are at 25%. i walk miles everyday in brooklyn “working class districts”. hundreds of folks, including myself milling about. the gov cheese is juicy past 50 years.

Mish

3 years ago

Reply to JRM

I post U-6 numbers with a comment every month – for years

JackWebb

3 years ago

Reply to Tony Bennett

My guess is that the states still handing out stim checks are doing it from the federal slush fund as opposed to the UE comp funds. The UE claims numbers are now unreliable as a measure. Same goes for the employment numbers that are not adequately capturing people with more than one job.

All of this will be going in reverse soon, and where we’ll really see it is in small business employment. The intrepid media is much more interested in turning Liz Cheney into Joan of Arc than how real people live. They have done virtually NO reporting on the precarious state of small businesses. That’s going to change. Just wait. They won’t be able to avoid it.

Lisa_Hooker

3 years ago

Reply to JackWebb

They will be able to omit it.

Salmo Trutta

3 years ago

N-gDp is still too high:

2020-07-01 38.7

2020-10-01 6.6

2021-01-01 10.9

2021-04-01 13.4

2021-07-01 8.4

2021-10-01 14.5

2022-01-01 6.6

2022-04-01 7.8

Tony Bennett

3 years ago

Reply to Salmo Trutta

Wait till the credit losses arrive.

Delinquencies still very low … when they arrive (and arrive they will) it will ratchet lending tighter … leading to vicious circle.

JackWebb

3 years ago

Reply to Tony Bennett

I’m sure there’s a good formula with lag times, but I don’t know what it is.

Tony Bennett

3 years ago

“The economic reports, other than the July jobs surprise”

…

It will be interesting to see how discrepancy between Establishment and Household Surveys shakes out.

Household Survey number of employed SA

March 2022 … 158.458 millon

July 2022 …158.290 million

Establishment Survey number of jobs SA (people can be counted more than once)

March 2022 … 150.925 million

July 2022 … 152.536 million

KidHorn

3 years ago

Once credit cards get maxed out, there will be a big drop in spending.

Tony Bennett

3 years ago

“Looking ahead expect much more weakness”

…

Won’t be long before folks need heat. Heating oil / propane prices well ahead of last year.

https://www.eia.gov/petroleum/heatingoilpropane/#itn-tabs-1

Another stake in discretionary consumption. Just finished hand splitting several cords of firewood to alleviate the pain.

vanderlyn

3 years ago

Reply to Tony Bennett

i’m digging until i reach a coal vein. i know she’s down there.

JackWebb

3 years ago

Reply to Tony Bennett

No one who matters is going to care about rising propane prices, because propane is pretty much limited to the countryside. But not so with heating oil. That’s very big in the East, so the media will notice.

worleyeoe

3 years ago

Reply to JackWebb

As propane goes, NG goes. As you well know, a lot of people are in for a rude awakening this winter, especially if our three peat La Nina turns out to be a colder than expected this winter. I still can’t believe FJB is letting the oil & gas industry export so much LNG & oil, especially the later to China. FJB literally thinks “China First” is the right policy. It’s to the point now that the only logical conclusion is his assault on Trump is about protecting his & Hunter’s butts. Everyone knows that if Trump gets back into office, he’s going to go after FJB & FHB. And, China literally has FJB over a barrel. He has to make sure we sell oil to them or they’ll leak all the bad business deals he’s lied about over the last five years.

As we both know, there’s lots of reasons to dislike Trump as a person, but My Gawd I’ll take his narcissistic ways over this bat sh!t crazy FJB administration any day. At least Trump is the first president in a long time that tried to put America First and did a nice job keeping us out of further military adventurism.

JackWebb

3 years ago

Reply to worleyeoe

Funny thing is that in this case, b.s. has a short half life. It’s obvious that the Rulers want to keep it going through September and October. We shall see.

Captain Ahab

3 years ago

Reply to worleyeoe

Biden’s taken a ‘servitor’ approach to China… I wonder why? Perhaps Xi has the answer?

Some of us tried to point out the dangers of not voting Trump. Sadly, the mass media propaganda won out.

Lisa_Hooker

3 years ago

Reply to Tony Bennett

Funny, every time I split a quarter cord I get shoulder pain.

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