Chart Notes
- The blue line is the base forecast. It is about all the public sees or hears about when the BEA releases its GDP reports, but it isn’t what matters most.
- The red line is Real Final Sales (RFS). That is the bottom line estimate for the economy and what does matter most.
- The yellow line is RFS to domestic buyers
- The green line is RFS to private domestic buyers. It excludes government and exports.
Real Final Sales is the true bottom line performance for the quarter. The difference between the baseline report and RFS is inventories which net to zero over time.
Mainstream media follows the baseline number, not what matters most.
GDPNow Current Estimate
Please consider the final update to the GDPNow Forecast for 2022 Q4 GDP.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 remains 3.5 percent on January 20. The nowcast was unchanged after rounding following this morning’s report from the National Association of Realtors.
This is the last GDPNow forecast for the fourth quarter. The first GDPNow forecast for the first quarter of 2023 will be on Friday, January 27.
Will GDPNow Hot Hand Continue?
The Blue Chip consensus is an expensive proprietary subscription. The Atlanta Fed is able to post some results with a lag.
December data (reported in January) has been miserable across the board. That does not necessarily matter. What does matter is what the data is vs what the models expected.
We have no idea what the Blue Chip expected.
What If?
The GDP model has a very hot hand in 2022. But historically, it has had some pretty big misses on occassion.
If we assume the Blue Chip forecast declines just a bit on the recent reports and downward revisions on retail sales and industrial production, that would put its estimate at roughly 1.5 percent.
Q: Is that recession territory?
A: Yes, because it’s a baseline forecast and that’s not what matters.
There is 1.5 percentage points between the GDPNow baseline forecast and Real Final Sales. Subtract 1.5 percentage points from the Blue Chip estimate and you are right at zero with incredibly weakening data across the board.
New Home Sales Cancellations
The cancellation rate for KBH was an amazing 68 percent.
The New Home Sales Report Is Another Negative Revision Swamp in November
November Revisions
- August from 661,000 to 646,000
- September from 580,000 to 559,000
- October from 632,000 to 605,000
Recall my post on December 23, The New Home Sales Report Is Another Negative Revision Swamp in November
Negative Groundhog Day
Those revisions are on top of negative revisions in October and September, now lowered again.
Is this a joke or what? Negative groundhog day perhaps?
What About Cancellations?
The Census Department does not subtract cancellations from its reports and cancellations due to rising mortgage rates have been huge.
To repeat, none of these revisions include cancellation and cancellation rates have been as high as 25 percent! [Make that as high as 68 percent]
In declining sales environments and economic downturns (now), the Census Department dramatically overstates sales, even if we ignore revisions.
In economic upturns, the Census Department understates sales.
Revisions
At economic turns, expect revisions. Heading into recessions, all of the revisions rate to be negative.
Expect to see negative revisions on jobs, more negative revisions on retail sales, and massive errors on new home sales that will not even be revised because the reporting methodology is outright flawed.
I will do a follow-up post later this weekend including a discussion with bond guru Lacy Hunt on the timing of the recession.
Meanwhile, note another huge inventory build (assuming GDPNow is correct on that score), smack in the face of hugely weakening data across the board.
Wonderland Economy
Cast of Characters
- Mad Hatter: Jerome Powell, Fed Chair
- Red Queen: Janet Yellen, Treasury Secretary
- March Hare: John Kerry, U.S. Special Presidential Envoy for Climate
- Humpty Dumpty: President Biden
- Alice: You decide
In case you missed it, please see my Wonderland experience Alice Debates the Mad Hatter and the Red Queen on Timing the Recession.
This post originated at MishTalk.Com.
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Mish
Monetary
policy is backwards. Monetarism has never been tried. If you wanted to get rid
of inflation, you should stop expanding the money supply, indeed drain the
money stock, and then gradually drive the banks out of the savings business
(increasing non-inflationary velocity).
The correct response to
stagflation is the 1966 Interest Rate Adjustment Act. “while the aggregate of
time and demand deposits continued to increase after July, the proportion of
time to demand deposits diminished. Whereas time deposits were 105 percent of
demand deposits in July, by the end of the year, the proportion had fallen to
98 percent. These were all desirable developments.”
M1 peaked @137.2 on 1/1/1966
and didn’t exceed that # until 9/1/1967. Deposit rates of banks decreased from
a high range of 5 1/2 to a low range of 4 % (albeit not enough). A .75%
interest rate differential was given to the nonbanks.
And during this period, the
unemployment rate and inflation rates fell. And real interest rates rose. But then the FDIC raised deposit insurance.
Analysis of bank debits as a
business cycle indicator 7-1-1963
We knew this already: In 1931 a commission was established on
Member Bank Reserve Requirements. The commission completed their
recommendations after a 7-year inquiry on Feb. 5, 1938. The study was entitled
“Member Bank Reserve Requirements — Analysis of Committee Proposal”
against debits to deposits”
After a 45-year hiatus, this
research paper was “declassified” on March 23, 1983. By the time this paper was
“declassified”, Nobel Laureate Dr. Milton Friedman had declared RRs to be a
“tax” [sic].
Remember that in 1978 (when Vi fell, but Vt rose) all
economist’s forecasts for inflation were drastically wrong. Put into
perspective: There were 27 price forecasts by individuals & 9 by
econometric models for the year 1978 (Business Week). The lowest (Gary
Schilling, White Weld), the highest, (Freund, NY, Stock Exch) & (Sprinkel,
Harris Trust & Sav.).
The range CPI, 4.9 – 6.5 percent. For the Econometric
models, low (Wharton, U. of Penn) 5.7%; high, 6.6% U. of Ga.). For 1978
inflation based upon the CPI figure was 9.018%
[and Leland J. Prichard (Ph.D., Economics, Chicago 1933,
Statistics, Syracuse U, Phi Beta Kappa) using the transactions concept of money velocity, in
his Money and Banking class, predicted 9%].
As I observed: Monetary flows’ propagation, are a
mathematically robust sequence of numbers (sigma Σ), neither neutral nor
opaque, which pre-determine macro-economic momentum (the → “arrow of time” or
“directionally sensitive time-frequency de-compositions”).
The “arrow of time” determines both maximum and
minimum values of a trend in the same direction. That’s how I predicted AAA
corporate yields in 1981 (as the RoC in M*Vt approached the prior reverse
trend’s 2 year limit). AAA Corporates yields rose to 15.49%. My prediction for
AAA corporate yields for 1981 was 15.48%.
Economics is an exact science. But there’s not an economist alive that knows the GOSPEL.
You have to appreciate the ire of the gold bugs. Bond prices have likely topped because monetary flows have now bottomed.
expropriation.”
interest compounds to the point that it can no longer be paid out of the
current revenues. Once the interest itself is debt financed, the compounding
accelerates.”
That’s why folks
subscribed to Dr. Franz Picks’ “Pick’s Currency Report”, a monthly newsletter,
and “Pick’s Currency Yearbook” (90 currencies each year).
The charges on debt are related to a cumulative figure; and
since the multiplier effects of debt expansion on income, the ingredient from
which the charges must inevitably be paid, is a non-cumulative figure, it would
seem that the time will inevitably arrive when further debt expansion is no
longer a practical or possible expedient, either to provide full employment or
to keep debt charges with tolerable limits.
Conference on Savings and Residential Financing 1961 Proceedings, United States
Savings and loan league, Chicago, 1961, 42, 43.
These were yesteryears’ “smartest guys in the room” (most
prominent economists of their time).
As the economic syllogism posits:
of funds is to be maintained and deflationary effects avoided”…
aggregate demand and therefore produces adverse effects on gDp”…
time-deposit banking, would tend to have a longer-term debilitating effect on
demands, particularly the demands for capital goods.” Circa 1959
Unless, you want to manage your investments in a command
economy, then the commercial banks must be gradually driven out of the savings
business.
Harvard professor Alvin Hansen called Mohamed El-Erian’s
“trifecta”: secular stagnation (based on the diminishing “factors of
production”), or as Martin Wolf is chief economics commentator at the Financial
Times, London says: “chronically deficient AD”. But it is really secular strangulation,
a chronic degenerative macro-condition (based on the Keynesian macro-economic
persuasion that maintains that a commercial bank is a financial intermediary).
“Disintermediation is made in Washington”.
As Luca Pacioli, a Renaissance man, “The Father of
Accounting and Bookkeeping” famously quipped: (debits on the left and credits
on the right, don’t go to sleep with an imbalance).
And Leonardo Da Vinci said it best: “Before you make a
general rule of this case, test it two or three times and observe whether the
tests produce the same effects”.
Example: This how I denigrated Nassim Nicholas Taleb’s
“Black Swan” theory (unforeseeaable event), 6 months in advance and within one
day:
[1] To: anderson@stls.frb.org
show this to you again – forecast:
Friedman, monetary lags are not “long & variable”. The lags for monetary
flows (MVt), i.e., the proxies for (1) real-growth, and for (2) inflation
indices, are historically, always, fixed in length.
real-output falls from (9) to (1) from Apr to May. Recent history indicates
that this will be a marked, short, one month drop, in rate-of-change for
real-output (-8). So stocks follow the economy down.
(difference between intraday high and intraday low) up to that point, at
1,010.14 points.
transactions rate-of-turnover) approximate roc’s in gDp (proxy for all
transactions in Irving Fisher’s “equation of exchange”).
This is set up exactly like the 5/6/2010 flash crash (which I predicted 6
months in advance and within 1 day).
market disequilibria.
“The Oct. 15th dis-equilibria was so profound and
unique that the Treasury did a joint staff study on it with the
“Diminishing market depth and a surge in volatility were
both on display Oct. 15, when Treasuries experienced the biggest yield
fluctuations in a quarter century in the absence of any concrete news. The
swings were so unusual that officials from the New York Fed met the next day to
try and figure out what actually happened”
Link: “Diminished Liquidity in Treasury Market”
“(Bloomberg) — Trading Treasuries keeps getting tougher
and tougher.
debt was renowned for its “depth,” Wall Street’s way of talking about a
market’s ability to handle large trades without big moves in prices. But
lately, that resiliency has practically vanished — and that’s a big
worry.”
Sometimes I document these events, sometimes not.
may vary a little from year to year) Example:
of the year, when the clouds hung oppressively low in the heavens, I had
been passing alone, on horseback, through a singularly dreary tract of
country; and at length found myself, as the shades of the evening drew
on, within view of the melancholy House of Representatives.”