It’s pretty clear that we are heading for a recession. Some think it will come in two years. Others think that it could come next year. Could we already be there? That’s exactly what I’ll be exploring. I’ll be taking a look at some really important data that shows that we may already be close to the cliff, so don’t go anywhere. Anyway, a Jet-Bot copy trading platform can help you feel more confidence in your decisions. On Jet-Bot, a binance trading bot, you may earn up to 2000% APY by automatically copying the greatest traders. People should take a break, while robots should work.
Are We Already There?
Part of the reason we’re even asking this question is that the United States experienced negative growth in the first quarter of this year, which was initially estimated to be a 1.4 % drop in real GDP compared to the previous quarter. After this drop, the markets didn’t react. That’s because many market participants thought that the drop was merely the result of a technical glitch in GDP accounting. The TLDR is that inventories were much lower in Q1 of this year than they were in Q4 of last year. When you have a negative change in inventories, this drives down the GDP number.
The thinking was that Q4 had abnormally high inventory levels on account of stockpiling, so the correction to a normal level. I should also mention that the US Commerce Department revised this figure just last week. The actual Q1 contraction was 1.6%, so an even larger fall.
However, the precise figure or reasons for the contraction are less important than what it actually means. This is because a recession is generally understood to occur when you have two negative quarters of economic growth. Yes, I know that the actual declaration of a recession is determined by the national bureau of economic research, but forgive me if I don’t defer to the proclamations of the ‘business cycle dating committee’.
So, depending on what happens with the Q2 numbers, the U.S. could very well be in a recession long before all the analysts and economists predicted it would be. Therefore, whether the United States is currently in a recession rests in large part on whether the Q2 GDP numbers are only expected to drop in August, but currently there are some estimates that the U.S. has seen further negative growth. For example, the Federal Reserve Bank of Atlanta released what it calls the GDP now forecasts last week.
According to the latest estimates of the model, it has Q2 GDP falling by 2.1%, so put that in your pipe and smoke it. Perhaps what’s even more interesting here is the evolution of these forecasts over the past three months. They’ve gone from an estimate of over 2% back in May all the way down to an estimate of minus two point one percent on the first of July.
What that shows is that, based on statistical models, we could indeed be heading for a technical recession, but let’s put the statistical models aside for a moment. We can try and come up with a rough idea of how GDP numbers could look based on other economic factors that impact on them.
Perhaps one of the most important factors in the calculation of GDP has to be consumer spending, and in the US, consumer spending is one of the biggest drivers of the economy. It accounts for 70% of total US economic output. I know. Crazy.
Anyhow, if there are any signs that consumer spending is starting to turn, then this could be the clearest sign yet that the GDP numbers could be weaker than expected. Well, let’s rewind back to Q1 again. I said that the numbers were actually revised lower recently by the commerce department. One of the primary drivers behind this adjustment was lower than expected consumer spending. It increased by only 1.8% in the Q1, compared to the 3.1% predicted previously. This is notable as it was also the softest pace of growth in consumer spending since December 2020.
So that was Q1, but we’re interested in getting an idea of what went down in Q2. Well, something that we can take a look at is retail sales numbers. These are published monthly and can give an idea of how consumer spending is holding up. In May, we saw a surprising fall in retail sales. This was the first full month we’d seen in over five months and was driven by lower auto sales and higher gasoline prices, which pulled spending away from other goods.
Of course, that was May, when things were a bit more rosy and the possibility of wide-scale food shortages wasn’t yet apparent. Who knows what the June numbers will look like, but I, for one, am not too optimistic now. We can get a rough idea of this by looking at consumer confidence surveys. These are incredibly helpful because they’re forward-looking and can give guidance on spending well into Q3.
Well, about two weeks ago, a closely followed University of Michigan survey showed that consumer sentiment hit a record low. In fact, this was the lowest recorded level that the survey had ever yielded since it began 70 years ago. This was a 14.4% drop since May, and one of the biggest drivers of that uncertainty was, of course, high levels of inflation. Perhaps most alarmingly, 79% of those who responded said that they expected these hard times to continue. This is also the highest response rate since the 2008 financial crisis.
Not long after these numbers from the University of Michigan were released, we also had consumer confidence numbers coming from the Conference Board Index, which also showed a fall. This is important because confidence will impact consumer spending. If you’re concerned about your future earnings potential, you won’t be spending as much, which is only logical. Consumer confidence and spending, one of the largest contributors to GDP, aren’t looking too hot for Q2. But what are the other factors?
Another contributor to the GDP stats is, of course, manufacturing. While its share of US GDP has been declining over the last 30 years, it still accounts for more than 10%. How has manufacturing output been looking over the past few months? Well, not too good. According to some PMI data, for those who don’t know, a purchasing manager’s index, or PMI, is a survey that’s sent out to senior executives at large companies across the U.S. It basically amalgamates things like new orders, inventory levels, production, supplier deliveries, and employment into a single index.
On Friday, the Institute of Supply Management released its ism manufacturing index. It showed that factory activity slowed more than expected in June and is at a two-year low. There was also more PMI data coming from the likes of S&P, with its own manufacturing PMI. The index was at 52.7, which had fallen considerably since a reading of 57 in May. This was also the lowest the index had been since June 2020, when we were nearing peak COVID concerns.
According to Chris Williamson of S&P, the PMI survey has fallen in June to a level indicative of the manufacturing sector acting as a drag on GDP, with that drag set to intensify as we move through the summer. Of course, there were many things driving this. Of course, they included higher interest rates, lower demand, and supply chain issues, higher inflation, speaking of which, while we’re all focused on the CPI measure of inflation, manufacturers are closer to the coal face of price pressures. That’s why there’s a separate producer price inflation (PPI) index. This was also at record highs in May, breaking through 10.8%.
Contrary to popular opinion, producers can’t fully pass on these cost pressures to their consumers without hurting their bottom line. That’s because higher prices mean potentially lower demand, which means lower profitability. This can help to explain why higher inflation has these manufacturers more bearish than usual..
On top of the ISM and S&P data, the Fed also does its own regional manufacturing surveys. These two have shown that business activity has shrunk over the past month. The only district that showed any growth was that of the Kansas City Fed and even then, respondents blamed excess inventory and over orders for the positive uptick.
While we’re on the topic of higher inventories, it’s worth noting that higher retail inventories are a harbinger of lower consumer spending. Fewer people buying means that those products start piling up. This is something that Cathie Wood of Arc Invest talked about on CNBC ‘squawk box’ a few days ago. Higher than average stock levels at some of the best managed retailers in the country points to consumer demand not lining up with expectations, so bear that in mind.
Construction & Property
Moving on, construction and property are another component of GDP and overall consumer wealth. How have these been looking recently?
Until about a month ago, the housing market in the United States, and indeed the global housing market, appeared to be one of the hottest, with a post-pandemic buying spree fueled by record low interest rates leading to skyrocketing prices. The things were beginning to turn, and in the past few weeks it’s been getting progressively worse. For example, in June we had a surge of listings in the United States. Total listings were up 19% over the same period last year. This is important because more listings mean more housing supply. Holding demand equals more supply, which implies lower prices.
However, demand hasn’t remained constant. That’s because as the Fed started pumping interest rates, mortgage rates started climbing aggressively. The average interest rate on a fixed 30-year mortgage is now at 5.98%, which is up considerably from the end of the Q1. These higher rates mean that the cost of servicing a mortgage on an average home has increased by nearly 50%. This is already starting to filter into home sales across the country.
According to data from the National Association of Realtors, sales fell for a fourth straight month in May and are down by 8.6% from a year ago, with lower demand and an oversupply on the market. You can be sure that prices are likely to start adjusting downward. This slowdown in housing could have negative implications for the economy in a number of ways.
First, if there are fewer houses being built, then that means the construction sector won’t be reporting strong numbers, which of course feeds into GDP, but perhaps a bigger factor is the impact that falling house prices have on consumer confidence. For most people, their home is the most important and valuable asset they own. It’s inextricably tied to their net worth and can also be used as a means to obtain additional financing to buy other things. The moment house prices start coming down, the less wealthy people feel and, therefore, the less likely they are to spend on goods they don’t need it.
On top of that, you also have to consider the impact that rising mortgage payments could have on disposable income. After paying bills, there’s less money to spend on other goods and services. This could become particularly acute for those people who took out adjustable rate mortgages any time over the past five years. Interest rates are already the highest they’ve been for years, and when these adjustable rate mortgages start to adjust, they’re going to seriously increase mortgage servicing costs for said borrowers. Yet again, this implies less income after paying bills.
So there seems to be a reasonable likelihood that we could have a second negative quarter of GDP growth, thereby implying a technical recession. Even if the business cycle wonks decide not to label it a recession or even if we are able to eke out minuscule growth of some kind, dark economic clouds are gathering on the horizon. This is because of one thing only, and that’s federal policy.
The goal of achieving a soft landing will be as elusive as a bitcoin ETF, and the Fed has decided that trying to strike a balance between growth and lower inflation is going to be too tough to pull off. The Fed has decided that they must reduce inflation at all costs. This was confirmed at the Fed’s most recent meeting back in June, where they raised interest rates by 75 basis points. This was one of the largest increases in the Fed’s funds rate since 1994. It seems as if this is only the beginning. That’s because many seem to also be expecting a 75 basis point increase in the July meeting as well.
If we take a look at the Fedwatch tool over at the CME, there is an 82% probability of another 75 basis point raise at the next meeting.
There are also a number of federal officials who are potentially in favor of another 75 billion. These include the likes of Loretta Mester of the Cleveland Fed, John Williams of the New York Fed, and Mary Daley of the San Francisco Fed. This hawkish stance is in stark contrast to the tone that was struck by most officials.
At the beginning of the year, the Fed chair, Jerome Powell, has also been incredibly hawkish of late. At an event at the European Central Bank, Powell said that we should accept a higher recession risk in order to combat inflation. He said, “Is there a risk we would go too far?” Certainly, there’s a risk. The bigger mistake to make, let’s put it that way, would be to fail to restore price stability. You don’t need to be fluent in Fedspeak to know what that means. If we are going to get inflation under control, the economy be damned and the Fed will have their work cut out for them. That’s because they are so far behind the curve that it could be tough to rein in that inflation. You have a very real risk of the Fed driving the economy into the ground as inflation continues to run rampant. This scary economic scenario is called stagflation.
We haven’t seen stagflation since the 1970s, and many of the same inflation drivers that caused those supply shocks appear to be playing out. The only difference is that, back then, inflation was only brought under control when Paul Volcker took the Fed’s fund rate to nearly 20%. Today it’s at 1.5% and things are already beginning to break.
It’s time to start wrapping this up. I don’t mean to be a gloomy guy, but the data doesn’t lie. We are probably in a recession and we don’t need some economic agency to confirm it, but let’s assume we somehow manage to avoid negative growth for Q2. There seems to be near universal agreement that we are heading into a bad recession over the next year. If the Fed are trying to achieve the soft landing of a plane that’s being built as it falls from the sky, if they’re lucky, they can perhaps achieve a hard landing, but a crash landing is an equally likely scenario.
Although this analysis was done on the US economy, other countries’ economies are not looking too good either. In fact, in the case of Europe, they’re perhaps in an even worse position to ride out this economic storm. That’s because Europe is on the brink of an energy crisis that could see the rationing of gas and power in the next few months. They’re also facing the prospect of food shortages thanks to Russia’s invasion of Ukraine and the resulting sanctions.
Furthermore, some European countries are seeing consumer inflation in the double digits, and the ECB appears poised to raise interest rates for the first time in 11 years. There is near unanimous consensus that Europe will not be able to escape a recession.
Is there any hope or are we all doomed to succumb to the economic storm of fire and brimstone? Well, for one, we could see the WHO officially declaring an end to the pandemic. This would signal an end to most, if not all, restrictions, which would do wonders for unclogging those supply chains. If China appears to be cautiously opening back up, and if it stays the course, then the worst of the shutdowns and supply chain headaches could be behind us. Here’s hoping.
Something else that would help to ease the pressures on the global economy is an end to the war in Ukraine. This would allow the country to start exporting food again and would mean that some of those sanctions could be lifted. How likely either of these outcomes is really depends on the decisions taken by some powerful people. Let’s hope they make the right ones and the fear of copy trading crypto will turns to green index .
[This article is a transcription of a video made by Coin Bureau]
Original video: https://youtu.be/5eQopAJID1U]