The July 7 update to the Atlanta Fed GDPNow Forecast bounced slightly higher to -1.9 percent.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is -1.2 percent on July 8, up from -1.9 percent on July 7. After this morning’s employment situation report by the US Bureau of Labor Statistics and the wholesale trade report from the US Census Bureau, the nowcasts of second-quarter real personal consumption expenditures growth and real gross private domestic investment growth increased from 1.3 percent and -14.9 percent, respectively, to 1.9 percent and -13.7 percent, respectively.
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 RFS bounce from +0.3 percent a week ago to +1.3 percent today is significant but many key reports for the quarter are still coming up.
If RFS comes in negative for the quarter, the recession may have started in the first quarter.
If not, then I will guess May given relatively strong but revised lower retail sales in April.
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 rose today because based on previous data, the model expected lower jobs numbers.
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.
June Jobs Report
For discussion of the June payroll report please see Jobs Grow by 372,000 but Employment Shrinks by 315,000.
Although jobs have been strong all year, employment has declined since March.
In expanding economies, discrepancies tend to resolve higher. At turns, discrepancies tend to resolver lower.
The jobs report in June was not as strong as it looks. See the link for further details.
Looking Ahead to More June Data
That subtitle looks strange given that it’s now July 8, but the economic reports for June are not yet in.
Key reports on retail sales, ISM, new home sales, existing home sales, CPI, PCE, income are coming up.
Data-wise, there’s still nearly a month yet to be seen. I expect most of that data to be weak.
The key numbers will be June retail sales and the Fed report on income and outlays.
Rate Hikes
CME Fedwatch has the odds of another three-quarter point hike at 95.4%, up from 86.2% a week ago.
I concur with the assessment. The stock market shrugging hikes off and the June jobs report incentivize the Fed to go with stronger hikes.
The next FOMC decision is on July 29, about three 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.
I am sure the Fed will be far over the line if the Fed gets to its target of 3.25% by December.
Inflation Expectations Nonsense
The Fed is worried about inflation expectations, a nonsensical idea. That worry is also likely to cause the Fed to tighten too much.
For discussion, please see Still More Inflation Expectations Nonsense in the Latest Fed Minutes
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.
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Mish
At this moment, I further believe that the covid response has made it harder than normal to accurately interpret employment data. The methodology hasn’t changed; it’s a matter of interpretation. I do not think the labor markets are as “tight” as they appear, or maybe it’s better stated that I think the “tightness” is thinner than it looks and is susceptible to a quick reversal that will make the numbers look very different in pretty short order.
That said, the proof will be in the pudding. Absent a return to those stupid lockdowns, I expect those numbers to look a whole lot different a year from now, and likely sooner. But that’s only my educated guess. The results will tell the story. The facts always rule with me, so we shall see.
Charles Goodhart and Manoj Pradhan.