The July 15 update to the Atlanta Fed GDPNow Forecast shows a slight dip to -1.5 percent.
Real Final Sales
Most eyes are on the headline number, but that’s not what one should be watching. The important number is Real Final Sales (RFS). It’s the true bottom line number for the economy.
A week ago, the GDPNow RFS estimate bounce to +1.3 percent from +0.3 percent. Today RFS settled lower at 1.0 percent.
If RFS comes in negative for the quarter, the recession may have started in the first quarter.
If not, May or possibly July seems likely.
Economic Numbers and GDPNow Reactions
Actual economic numbers do not matter to the GDPNow forecast. What does matter is the strength of the data vs what the model expected.
This is why the model forecast frequently goes in the opposite direction of the appearance of strength or weakness in the data.
The GDPNow forecast fell today because based on previous data, the model expected better CPI data or better retail sales data than what happened.
A week ago I commented “This likely sets the tone for higher model expectations looking ahead. I expect weakness.”
We are all treating these numbers as if they are likely because the final GDPNow model forecast for each quarter has been very good for many quarters.
However, the model could easily be off in either direction by a substantial amount.
Retail Sales Look Strong But Fail to Keep Up With Soaring Inflation
Retail sales rose 1.0 percent in June.
The Bloomberg Econoday forecast was for 0.9 percent. But the Commerce Department revised May up from -0.3 percent to -0.1 percent.
Effectively June retail sales were 0.3 percent higher than economists expected, but the GDPNow model expected even better (or the CPI lower), thus its estimate fell.
Real vs Nominal Retail Sales Detail
Strong Consumer?
It’s real sales not nominal sales that add to real GDP.
Nominal sales rose again, but real retail sales peaked 15 months ago!
For further discussion, please see Retail Sales Look Strong But Fail to Keep Up With Soaring Inflation
Looking Ahead to More June Data
That subtitle looks strange given that it’s now July 15, but the economic reports for June are not yet in.
Key reports on ISM, new home sales, existing home sales, PCE, and income are coming up.
Rate Hikes
CME Fedwatch has the odds of another three-quarter point hike at 69.1% with a full point hike at 30.9%.
The next FOMC decision is on July 29, about two weeks from now. Even if we are borderline recession now, another 75 basis point hike ought to do the trick.
Given the lagging nature of hikes, lagging nature of jobs, and a tight labor market, the Fed is likely to overshoot. A 75 basis point hike to 2.25-2.50% could do it.
Expect a Long But Shallow Recession With Minimal Job Losses
From a jobs standpoint I expect a Long But Shallow Recession With Minimal Job Losses.
From a stock market perspective, I expect things will be brutal.
For discussion, please see Artificial Wealth vs GDP: Why Earnings and the Stock Market Will Get Crushed
This post originated at MishTalk.Com.
Thanks for Tuning In!
Please Subscribe to MishTalk Email Alerts.
Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.
If you have subscribed and do not get email alerts, please check your spam folder.
Mish
https://www.freightwaves.com/news/daily-infographic-money-not-covid-is-the-biggest-travel-hurdle-this-summer
Both the 10mo roc in DDs and the 24mo roc in DDs crater in November (but that time series is not as accurate as required reserves).
Link: https://www.yardeni.com/pub/monetagg.pdf
See: Figure 24 Demand deposits as a percentage of M2
That gives an extra monetary punch.
“the Fed is likely to overshoot. A 75 basis point hike to 2.25-2.50% could do it.”
Today thermometers hit 40.3C at Coningsby in Lincolnshire, while 33 other locations went past the UK’s previous highest temperature of 38.7C, set in 2019.
impact on prices unless it is being exchanged.
lend deposits. Deposits are the result of lending. Bank-held savings have a
zero payment’s velocity (like remunerated IBDDs which have little reserve
velocity).
track required reserves (as reserves were driven by payments). As Dr. Richard Anderson
pointed out: (11/16/06 “Since
no one in the Fed tracks reserves”).
There was a perfect
connection between required reserves and both R-gDp and prices (which nobody
knew). That’s how I predicted both the flash crash in stocks and the flash
crash in bonds. Now, Powell has eliminated them. The FED is operating without
an anchor or a rudder.
2022 agrees with me:
the Board of Governors reduced the reserve requirement on checkable deposits to
zero. This action ended the Fed’s ability to control M1. In February 2021 the
Board redefined M1 so that M1 and M2 are very nearly identical. Consequently,
it makes little sense to distinguish between them. In any event, the checkable
deposit portion of M2 cannot be controlled now because there are no longer
reserve requirements on these deposits. Here is the reason the Fed cannot
control these deposits.”
credit control device, at the disposal of the monetary authority in a free
capitalistic system through which the volume of money can be properly
controlled is legal reserves. The FED will obviously, sometime in the future,
lose control of the money stock.