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Hello Recession Deniers, It's Already Time to Ponder a Third Quarter of Negative GDP

The third quarter is not off to a great start. On the initial data reports, the GDPNow forecast took a big hit vs the initial projection on July 29.
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GDPNow Data from Atlanta Fed. Chart by Mish.

GDPNow Data from Atlanta Fed. Chart by Mish.

Latest estimate: 1.3 percent — August 1, 2022

Economic data for the third quarter is only a few days underway. But please note the Atlanta Fed GDPNow Model is already headed the wrong direction. 

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 1.3 percent on August 1, down from 2.1 percent on July 29. After this morning's Manufacturing ISM Report On Business from the Institute for Supply Management and the construction spending report from the US Census Bureau, the nowcasts of third-quarter real personal consumption expenditures growth and real gross private domestic investment growth declined from 2.5 percent and -1.4 percent, respectively, to 1.5 percent and -2.1 percent, respectively.

Manufacturing ISM® Stays Positive. But For How Long?

Earlier today I asked, Manufacturing ISM® Stays Positive. But For How Long?

Three Key Points

  1. Inventories are at their highest level since July 1984.
  2. New orders and employment contract for the third month.
  3. The backlog of orders is barely positive

This does not bode well for US manufacturing looking ahead.

ISM and Construction Spending

ISM reports have a way of tanking the GDPNow estimates. But it's not the numbers that matter actually. Rather its what the model expected vs the data that mattered. 

Either the ISM numbers or the June construction report numbers were worse than the model expected.

The second quarter is over and I usually don't dwell on the past, but Econoday reports June construction spending was -1.1 percent vs an expected 0.2 percent.

I sent an email to Pat Higgins, GDPNow creator, asking which was more important, ISM or construction spending. If I get an answer I will post it.  

I'll Take The Under Flashbacks 

On July 29, 2022, I commented The Initial GDPNow Forecast for Third-Quarter GDP is 2.1 Percent. Once again, I make my quarterly statement. I'll take the under.

GDPNow 2022 Q2 initial estimate from the Atlanta Fed, annotations by Mish.

GDPNow 2022 Q2 initial estimate from the Atlanta Fed, annotations by Mish.

January 28, 2022 Flashback

GDPNow 2022 Q1 initial estimate from the Atlanta Fed, annotations by Mish.

GDPNow 2022 Q1 initial estimate from the Atlanta Fed, annotations by Mish.

On January 28, I commented With Nearly Everyone Looking the Other Way, It's Time to Discuss Recession

Hello Recession Deniers

Continuing the January 28, theme the title of this post is "Hello Recession Deniers, It's Already Time to Ponder a Third Quarter of Negative GDP"

Others noted the inventory vs orders disconnect as well. 

"The last 4 times the spread between New Orders and Inventories in the ISM Manufacturing Index was this negative, the US was already in a recession. The 2001, 1990-91, and 1981-82 recessions never had readings this low."

Chip Check Reality

San Francisco Anecdotes

Things that Don't Make Sense

Is Powell a bad liar or is he more economically illiterate than most thought?

Yellen, No Evidence of Recession

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Yellen On July 24

Yellen on July 25

Technical Recession

A "technical" recession is indeed two quarters of negative GDP. However, that is not the definition of recession. 

Many people on Fintwit accused the White House, Powell and Yellen of changing the definition. The definition of recession did not change.

Here's my take: 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.

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.

Transition Time

A transition to slow growth is either delusional or a bald-faced lie. 

Those in the "lie" camp may believe Yellen is providing cover for Fed Chair Jerome Powell for more rate hikes. 

I think Yellen is proven clueless, but that does not rule out a lie. 

Looking Ahead

Much of GDP changes very little throughout the quarter (military spending, Medicare, Social Security, food stamps, etc.)

It's cyclicals (durable goods and housing) that tend to drive expansions and recessions.

July may see improvement on inflation based on energy. But rent (over 31 percent of the CPI) is still rising. Consumer sentiment is poor and inflation-adjusted retail sales do not rate to be good for the entire quarter.

Cyclical Discussion

Housing will be another big bust this quarter. And durable goods rate to follow housing. Manufacturing rates to be negative. 

Hopes for the quarter rest solely on consumer spending and falling inflation. But don't count on strong retail sales.

Add it all up and you have a third quarter of negative GDP.

This post originated at MishTalk.Com.

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