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With Nearly Everyone Looking the Other Way, It's Time to Discuss Recession

The economy is not soaring as widely believed. Details show weakness and there are six strong reasons to believe that weakness will accelerate.
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GDPNow Initial Forecast for 2022 Q1, Chart by Atlanta Fed, Chart Comments by Mish

GDPNow Initial Forecast for 2022 Q1, Chart by Atlanta Fed, Chart Comments by Mish

Initial Estimate: 0.1 Percent — January 28, 2022

Inquiring minds are looking at the Initial GDPNow Forecast for the first quarter of 2022.

The initial GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2022 is 0.1 percent on January 28. The initial estimate of fourth-quarter real GDP growth released by the US Bureau of Economic Analysis on January 27 was 6.9 percent, 0.4 percentage points above the final GDPNow model nowcast released on January 26.

In the past two quarters, the GDPNow forecast started out high and finished low. 

GDPNow Final Forecast for 2021 Q4

GDPNow final forecast for 2021 Q4, Data Atlanta Fed, Chart by Mish

GDPNow final forecast for 2021 Q4, Data Atlanta Fed, Chart by Mish

Real final sales is the true bottom line measure of the economy. For the second consecutive quarter, the GDPNow forecast started out strong and finished with a whimper. 

GDP Up 6.9% Is Mostly An Artificially Boosted Illusion

On January 27, I commented GDP Up 6.9% Is Mostly An Artificially Boosted Illusion

Inventory Adjustments

Change in Private Inventories (CIPI) added a whopping 4.9 percentage points to real GDP in the fourth quarter. Since inventories net to zero over time, the true bottom-line estimate of real GDP was 2.0%.

For the third quarter, CIPI added 2.20 percentage points to real GDP.

Thus, of the reported 2.3% GDP gain for the third quarter, nearly the entire rise was an inventory adjustment. 

Thus, the GDPNow final forecast was nearly on the mark. The Atlanta Fed projected real final sales of 1.9% and the BEA reported 2.0%. 

For the third quarter of 2021, real finale sales were a miniscule 0.1%.

Initial GDPNow Forecast 

  • GDP: 0.1%
  • Real Final Sales: 2.3%
  • CIPI: -2.25%

2.3 percent is an OK number, assuming it happens. But will it? 

I believe no. But we have data coming in for more than four months before we know. 

Tweet Chain Discussion

Another Under Taker 

The chart I was referring to was the lead chart at the top.

Recession Discussion

The National Bureau of Economic Research (NBER) is the official arbiter of recessions. 

Scroll to Continue

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Many people incorrectly believe that it takes two consecutive quarters of negative GDP for a recession to start. 

That is not the case. Two consecutive quarters of negative GDP is a sufficient but not necessary condition. 

Down, up, down can easily mark a recession start, especially if the up quarter is weak.

Overly Optimistic Initial Forecasts 

The GDPNow current real final sales forecast of +2.3 percent is not in the recession ballpark.  

However, the GDPNow trend is overly optimistic initial forecasts.  

GDPNow Final Forecast for 2021 Q3

GDPNow Final Forecast for 2021 Q3, Data Atlanta Fed, Chart by Mish

GDPNow Final Forecast for 2021 Q3, Data Atlanta Fed, Chart by Mish

For 2021 Q3 the GDPNow initial model was +2.3 percent for real final sales. It finished at -1.6 percent. The BEA reported +0.1%. 

Thus, the GDPNow model was a bit pessimistic for Q3 but spot on for Q4. In both cases, the initial forecast for the quarter was hugely optimistic. 

What Can Go Wrong?

  1. The Fed is hiking
  2. Stimulus has worn out
  3. The stock market is stumbling
  4. Pending Homes Sales Unexpectedly Decline 3.8 Percent in December
  5. Merchants are stockpiling and pre-ordering everything
  6. Retail sales are falling

The Fed has everything under control. So, what can possibly go wrong?

I now expect a recession no later than the end of 2023.

Addition

I am sure we missed many others but just added new points.

7. Major deceleration in deficit spending.
8. Declining working age population will reduce productivity.

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