My last update was on August 17. The Nowcast has gone nowhere in an interesting way.
August 23: New Home Sales Surge in July, What Will that Do for GDP?
New home sales were up 10.6 percent in July, and an amazing 19.8 percent factoring out a big upward revision. What will this do to GDP estimates?
A Big Nothing?
Since completions went nowhere, I am not convinced there is any positive impact from this report, as remarkable as that may seem.
In the spirit of being positive, I will take a stab at +0.05 percentage points (PP) contribution to residential construction in the GDPNow forecast on Monday.
A Big Nothing it Was
The contribution to residential constriction fell 0.04 PP, I suspect due to completions. For those interested in how I arrived at nothing, click on the above link.
There were no further updates until August 30.
PP Contributions to GDP Forecast August 30
- PCE Goods increased from 0.98 PP to 1.23 PP (+0.25 PP)
- PCE Services increased from 1.05 PP to 1.36 PP (+0.31 PP)
- Gross Private Domestic Investment (GPDI) Increased from -0.44 PP to -0.02 PP (+0.44 PP)
- Change in Net Exports fell from +-.04 to -0.39 (-0.35 PP)
- Other minor changes
The BEA Revises Income in May and June Lower, But Spending Higher
On August 30, I reported The BEA Revises Income in May and June Lower, But Spending Higher
With spending unexpectedly higher, the contribution to Personal Consumption Expenditures (PCE) rose a combined 0.56 percentage points.
The change in net exports (surge in import spending) wiped out the increase in GDPI.
PP Contributions to GDP Forecast September 3
- PCE Goods fell from 1.23 PP to 0.95 PP (-0.28 PP)
- PCE Services fell from 1.36 PP to1.25 PP (-0.11 PP)
- GDPI fell from -0.02 to -0.11 (-0.09 PP)
- Government Expenditures fell from 0.34 to 0.30 (-0.04)
- Net Exports rose from -0.39 to -0.35 (+0.04)
The ISM and construction spending reports on September 3 took away the entire bounce on August 30.
September 30: ISM Index Little Slightly Better But New Orders and Production Contracting Faster
September 30: Construction Spending Growth Slows in May, Stops in June, Negative in July
Note that the overall ISM number rose. I did not verify with GDPNow creator Pat Higgins but I suspect GDPNow took a hit because the ISM production index fell from 45.9 to 44.8.
New orders (which were terrible) will drive future GDP. Current production will drive current GDP.
A similar thing happened with the surge in new home sales.
Slight Bounce Today
The 0.1 PP bounce today was due to the GPDI contribution rising from a net -0.11 PP to +0.01 PP (+0.12 PP) related to the Census Bureau’s durable goods and international trade (trade deficit) reports.
A Reader Question on GDPNow, How Does the Model Work?
Since August 17, the model nowcast rose on good data and fell on bad data.
That is not always the case. Frequently, the GDPNow nowcast increases on bad data and drops on good data.
This happens because the nowcast changes not on the data itself but rather what the model expected vs the incoming data.
For discussion, please see A Reader Question on GDPNow, How Does the Model Work?
When I make a GDPNow estimate, it is always vs my expectation of what the model predicts, not what the data is.
I did not post an estimate for the latest IMS reaction because GDPNow was out before I did my ISM report.
However, my mental estimate (before I looked at GDPNow) was what happened. That’s because I did not think the model expected a decline in the production portion of ISM.
Looking at the headline number, one might have thought the impact would be benign.
It’s not always clear how the model will react to data.
To estimate the GDPNow reaction, one needs to make an educated guess as to what the model expects rather than looking at just the data. It’s a totally different mindset.
Looking ahead, I expect weak data and declining GDPNow nowcasts.
Are the model expectations not based on consensus forecast numbers? Or is it some internal fed forecasts?
Don’t worry as the powell put is still in place. The fed isn’t going to let the stock market drop more than a short term correction at worst.
Is the “Everything Bubble” about to pop? Let’s start with what we’re told: there is no bubble, all the assets soaring to unprecedented heights are reasonably priced at a “permanently high plateau” because of AI, scarcity of housing, scarcity of Ferraris, interest rates trending down, the Fed waving dead chickens around the campfire, people buying toothpaste, and so on: you name it, it’s a reason for assets to drift higher.
This all sounds rather splendid, but somehow the pump inflating the bubble goes unmentioned: it’s the money, Honey, the tens of trillions of yen, yuan, euros, dollars, pesos, etc., being borrowed or conjured into existence since the last spot of bother in 2008, where each unit of currency enters the global free-for-all chasing assets.
https://charleshughsmith.substack.com/p/is-the-everything-bubble-about-to
Can you feel it? You know … that feeling that everything is about to implode… and the understanding that the Central Banks are out of bullets.
I felt this same feeling in 2019…. the crescendo was building … and then they foisted Covid on us … and those nasty nasty evil vaccines….
I reckon that was all about 1. one last massive wave of stimulus and 2. prepping us to be exterminated so that 8 billion of us are not on the streets in the dark once collapse happens…. starving people would do some horrible things to each other… murder, rape, cannibalism
The Men Who Run the World will pre-empt that… the vaccines have damaged billions of immune systems… something is coming that will leverage that and put the 6B+ who took those shots down…
Those of us who have not should not celebrate… we’ll wish we were dead when this goes down
It’s Armageddon! It’s the Apocalypse! Fast Eddy wishes he was dead already. Mercy!
Real Sales have been moving ‘sideways’ since pent-up demand driving post-Covid sales faded. At a time when the population is increasing (births and immigration), real sales per capita are actually declining–I’d expect about 2-3% per year
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IMHO we are in the early stages of a serious global decline, an opinion reinforced by retail closures, slowing employment, increasing credit, government excess, vapid politicians, and so on.
Expectations tend to exaggerate–people think the decline will be minor, if any; or a rapid drop to economic hell. Most times, it’s really a series of ups and downs, with downs a bit stronger as momentum picks up and optimism segues to pessimism. It comes down to impetus, It doesn’t need to a ‘low probability-high impact event,’ except that when systems get stressed, failure generally occurs where it is unexpected or overlooked (as in 2007-8), so the impact is greater.
You could be right. Though the future is hard to predict.
What are some of the “keys” to economic growth and improved standards of living overall.
1. Energy: without an ever growing amount of inexpensive energy, none of the gains in the last 100 or so years would be possible. For growth to continue we need even “more” inexpensive energy. Traditional energy from fossil fuels is in danger of becoming more expensive as the easy stuff has already been used. It is debatable if the world can produce enough renewable energy to make up the difference.
2. Innovation: The advances made in science, health, and technology have also helped drive economic growth and living standards. I see this continuing.
I continue to expect slow growth, in the 1% per year range.
“Traditional energy from fossil fuels is in danger of becoming more expensive as the easy stuff has already been used.”
Boy that’s “potentially” an understatement. It’s definitely a known unknown. But, as you say in #2, technology will drive economic growth & living standards, which in my view applies to all forms of energy as well.
As I’ve said before, I was a big peak oiler back in the early days of the Iraq war, researching continually to understand what the future held for the eventual decline of oil.
Today, that seems like a fool’s errand from 20 years ago, as technology seems to be opening new horizons for oil. But, I do agree that the fossil fuel trend will be higher, due mainly to the fight over climate change and regulation of the industry.
Like any futurism, it’s hard to say if peak oil will occur well before renewables, including batteries, can save the day along with nuclear, thereby clouding a reasonable economic transition away from oil.
And like I said the other day, I’m glad the US is sitting on a ton of oil shale in Green River, but I certainly hope we don’t ever have to use. Methane hydrates under the sea floor are another potential fossil fuel bonanza.
Congrats on posting something that didn’t get a down vote ; )
People are alway talking about “peak” something.
Oil, copper, lithium, stock markets, etc. Doom and gloom sells.
I’m disappointed if I don’t get downvotes.
“ Doom and gloom sells.”
I agree, but it does seem like we’re approaching a tipping point, as you say. When it arrives, we’ll all know that it’s time to be doomy & gloomy. It will be quite obvious. Until then, keep figuring out how to stay ahead of the curve, whether that’s building wealth, doing good for people, enjoying your friends & family or prepping for said doom & gloom.
So, as long as we deficit spend about 10% of GDP we can buy GDP growth of about 3%. Let the good times roll.
Yes. The US will continue to do just that. The question is, how will each of us take advantage of it? Because it isn’t going to change. No matter who you vote for.
Historically, oil takes a beating in economic downturns. See the chart here. https://realinvestmentadvice.com/high-gas-prices-and-recessions While supppliers can affect the flow, demand really does decline in recessions–keeping in mind that China subsidized oil circa 2008.
I’ll be looking at ‘oil’ at $50-$60, depending on momentum relative to long term trends. The farther away from the long term trend, the greater is the ‘pressure’ for lower prices, including a drop below the long term trend.
Right now, IMHO, the global momentum is slowly swinging to safety/wealth preservation, where I’ve been positioned for a while, now.
You could be correct. Though my investment position (50% in energy stocks) says something different.
Though I have been reducing my exposure to the oil stocks that I consider riskier in a downturn and switching to safer bets.
For example: I picked up more Peyto today when it dropped in price.
It is 82% weighted to natural gas with 68% of 2024 production and 56% of 2025 production hedged at close to $4. (vs cash cost of $1.05) Its dividend is 9.3 % and is covered by its cashflow 2.2 x.
“where I’ve been positioned for a while, now”
Me too, brother!
But, I’ve got a handful or stocks that I want to jump on, when the time / slump comes.
Looks like continued slow growth to me. Low energy prices helping to keep inflation down. Canada dropped rates for a third time today. The US to follow soon. Somehow the central banks seem to be managing things pretty well. Though the future is hard to predict.
Buying the dip in energy stocks today. As I have been doing for several years now.
I have bought and sold the stocks in the “falling knife” portfolio multiple times now. Loving the opportunity provided by the volatility!
Canada has to cut.
Mortgages in Canada are not locked in for 15 or 30 years like they are in the US. They renew every 5 years or so and if rates are kept high, probably half or more of the mortgages won’t be able to be renewed and which point all hell will break loose.
Yes. Very different there.
Looked up some stats.
34% of Canadian homes are mortgage free.
On average, Canadian Home Equity is 73% of the home’s value.
The rate of mortgage arrears (90+ days) is 0.18% in Canada vs 1.52% in the US.
Looks like they are doing okay based on those stats.
Yeah Canada is pretty screwed. They will have to suffer either inflation from lower rates or deal with housing collapse if rates go up. The only way out is balance the budget to avoid inflation and drop rates – but no politician will do that. Pretty much same picture in the US. (Canada mortgage stats look good because they allowed neg amort at 5 yr refi to avoid a collapse).
I don’t see how they are screwed based on the numbers I looked up. Average of 73% equity in their homes.
The people who are screwed are the ones, like here in the US, who want to buy a home but can’t afford to do so.
Homes are a major example nowadays of income inequality.
And, it’s going to get worse as high prices move more homes towards rental only.
Maybe Phil is talking about only current homeowners. I’m not sure.
Maybe. But he said “housing collapse if rates go up”.
Rates are going down. And it seems like current homeowners have a ton of equity. So I don’t get it.
I believe adjustable-rate mortgages are also big in CA.
Nominal cash sales up as widget sales plunge.