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GDP is -0.9 Percent, Second Straight Decline, But a Recession Did Not Start in Q1

There will be talk of a recession starting in the first quarter. Forget about it. Look for May as the start.
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GDP Data from the BLS, chart by Mish

GDP Data from the BLS, chart by Mish

Technical Recession?

There will be plenty of talk today about a "technical recession" or simply a "recession" starting in the first quarter based on two consecutive quarters of GDP. 

But that is not the definition, nor is it a good definition, nor did the White House change the definition change as scores of people on Twitter stated yesterday.

Real Final Sales 

GDP declined for two quarters but Real Final Sales (RFS) did not. RFS is the true bottom line estimate for the economy. The baseline number includes inventory adjustments that net to zero over time. 

Unless the BEA revises RFS into negative territory, don't expect a Q1 recession declaration. 

The National Bureau of Economic Research (NBER), is the official arbiter of recessions. It is highly unlikely to declare a recession starting in the first quarter with RFS at +1.1 percent.

GDP Numbers 

GDP Data from the BLS, chart by Mish

GDP Data from the BLS, chart by Mish

In billions of dollars, we see the same thing: Two consecutive quarters of decline in real GDP but not RFS. 

There's no Q1 recession in my book and I highly doubt the NBER will declare one either. 

Curiously, I believe a recession started in May. I will go over why shortly. First, let's dive into the Advance GDP Report for Q2

The GDP Items and Key points that follow are courtesy of Rick Davis at the Consumer Metrics Institute. Thanks Rick!

GDP Items 

  • Consumer spending for goods was reported to be contracting at a -1.08% rate, down 1.01 percentage points (pp) from the prior quarter. 
  • The headline contribution for commercial/private fixed investments was reported to be -0.72%, down a material 2.00 pp from the prior quarter. 
  • Inventories subtracted -2.01 pp from the headline number, down 1.66 pp from the prior quarter. It is important to remember that the BEA's inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity pricing or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series. 
  • The contribution to the headline from governmental spending was reported to be -0.33%, up 0.18 pp from the prior quarter.
  • Imports subtracted -0.49% annualized 'growth' from the headline number, up 2.20 pp from the prior quarter. 
  • Foreign trade contributed a net 1.43 pp to the headline number. 
  • Real per-capita annualized disposable income was reported to have decreased by $79 quarter to quarter. 
  • The annualized household savings rate was 5.2% (down 0.4pp from the prior quarter). In the 56 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 1.15%. 

Key Points 

  • For this estimate the BEA assumed an effective annualized deflator of 8.86%. During the same quarter the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was higher at 11.02%. Under estimating inflation results in optimistic growth rates, and if the BEA's nominal data was deflated using CPI-U inflation the headline growth number would have been -3.18%. 
  • Consumer spending on goods moved deeper into contraction, with the growth rate for all consumer spending declining by about a half percent. 
  • Commercial spending on fixed investment also began to contract, primary due to weakening residential construction. 
  • Real household income and savings rates continued to shrink. The consumer is in no position to quickly reverse the course of the headline number. 

Changing Definition?

Sorry guys, there was no definition change. Countless people on Twitter made the same baseless claim. 

NBER on Recession

Please consider the NBER's Business Cycle Dating Procedure: Frequently Asked Questions

Q: What indicators does the committee use to determine peak and trough dates?

A: The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies. These include real personal income less transfers (PILT), nonfarm payroll employment, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, employment as measured by the household survey, and industrial production. There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions.

Q: Where does the committee obtain the data for the indicators that it generally consults in determining the dates of its monthly and quarterly chronologies?

A: Data for all indicators can be found and downloaded from “FRED”, the data website maintained by the Federal Reserve Bank of St. Louis. These are the search terms that will bring up each monthly series listed in the earlier FAQ:

  • FRED real personal income less transfers
  • FRED nonfarm payrolls
  • FRED real personal consumption expenditures
  • FRED real manufacturing and trade sales
  • FRED household employment
  • FRED index of industrial production

Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dates?

A: Most of the recessions identified by our procedures do consist of two or more consecutive quarters of declining real GDP, but not all of them. In 2001, for example, the recession did not include two consecutive quarters of decline in real GDP. In the recession from the peak in December 2007 to the trough in June 2009, real GDP declined in the first, third, and fourth quarters of 2008 and in the first and second quarters of 2009. Real GDI declined for the final three quarters of 2001 and for five of the six quarters in the 2007–2009 recession.

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Q: Why doesn't the committee accept the two-quarter definition?

A: There are several reasons. First, we do not identify economic activity solely with real GDP, but consider a range of indicators. Second, we consider the depth of the decline in economic activity. The NBER definition includes the phrase, “a significant decline in economic activity." Thus real GDP could decline by relatively small amounts in two consecutive quarters without warranting the determination that a peak had occurred. Third, our main focus is on the monthly chronology, which requires consideration of monthly indicators. Fourth, in examining the behavior of production on a quarterly basis, where real GDP data are available, we give equal weight to real GDI. The difference between GDP and GDI—called the “statistical discrepancy”—was particularly important in the recessions of 2001 and 2007–2009.

Real Final vs Baseline GDP 

With the bottom line estimate of RFS at 1.1 percent, the BEA is not going to time the recession starting in Q1, nor should it, barring huge negative revisions by the BEA.

Kudos to GDPNow 

Data from GDPNow Forecast, chart by Mish

Data from GDPNow Forecast, chart by Mish

Recession Started in May

Yesterday, and for most of the past few months I stuck my neck out a bit on a recession call starting in May. 

My opinion was based on the likelihood of positive RFS for Q2. 

For  discussion, please see Based on Analysis of the Final Q2 GDPNow, a Recession Started in May

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.

The GDPNow RFS estimate is 1.1 percent.

If accurate, that would rule out a recession starting in the first quarter. But it does not rule out a recession starting in May, my preferred starting month. 

Starting in May, retail sales floundered and housing fell though the floor. The RFS component of GDP fell from 3.7 percent to 1.1 percent.

That means -2.6 percent on RFS in May and June. That's a pretty steep contraction. Strength in April negates a recession starting in the first quarter regardless of two quarters of negative GDP.

Looking Ahead

My May recession date depends on a couple of things: A GDP report from the BEA tomorrow that confirms GDPNow, and continued housing and retail sales weakness that I expect. 

How to Think About Recessions

Two consecutive Qs of declining GDP is a bad definition. Was there no Covid recession?

I look at it this way

  • 2 Qs of declining baseline GDP is insufficient.
  • 2 Qs of declining RFS is a sufficient but not necessary condition.

This allows for Covid as well as consecutive Big Down, Small Up, Big Down quarters.

The NBER could be far more timely, but their thought process is at least defendable. 

Looking Ahead Stage Two 

The BEA confirmed the GDPNow final expectation. Once again, kudos to Pat Higgins at the Atlanta Fed for an very accurate final call. 

If we get the continued weakness I expect, led by housing, look for the NBER to eventually time the 2022 recession as starting in May.

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

For now, the market is cheering the likely end of aggressive hikes. However, a recession is baked in the cake along with declining corporate profits. 

This post originated at MishTalk.Com.

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