Little bits of hope The US economy grew by 2.6% in the third quarter, higher than the 2.3% that was initially expected. This is the first quarter of positive growth in 2022 – remember the first two quarters, which showed a slowdown in economic growth, were the textbook definition of a recession. Unfortunately, a large part of that growth was driven by a smaller trade deficit, which is a one-time thing for the quarter and not necessarily indicative of true economic growth. Moral of the story: Consumer spending is the bulk of what drives our economy. It contributed to 1.4% growth in this latest quarter, but that’s down from 2%…

It’s a mess Some level of normalcy has finally returned in my life, and I’m so happy to finally be back in your inboxes. A lot has happened since the last time I wrote to you so this week is a bit more of a catch-all of the important developments that have created complete chaos in the markets in the last month. At the top of the list, without a close second, is the Federal Reserve. They have turned the financial markets completely upside down by doing the most aggressive 180 turn in monetary policy literally ever. Actually, this has been the most aggressive monetary tightening cycle ever. They let…

Free-fall Friday  This month, the central bank didn’t actually hold an official policy meeting, but instead came together for the annual Jackson Hole retreat. After months several months of v aggressive policy changes to bring down inflation, the market was ready to hear the latest updates from Chairman Powell on Friday morning. Despite several data points indicating that inflation is, in fact, peaking, Powell seemed unwavering in his path to continue jamming his foot on the brakes of the economy to bring down inflation closer to the 2% range. Moral of the story: We’ve seen reports of inflation peaking over the last few weeks, which had provided the market with…

Peaking inflation Inflation has been the biggest topic of conversation for what feels like forever and we’re finally starting to see signs of “peaking” inflation. The consumer price index, which measures the changes in the prices for a set basket of goods and services, stayed flat for the month of July, which is the first time it hasn’t increased in months. Even though prices are still meaningfully higher versus last year, we’re finally starting to see signs that they’re not continuing to rise at an astronomical pace. In even better news, prices for producers actually decreased slightly during the month, and producer prices tend to be a precursor to consumer…

Sliding GDP (the measure of economic growth) fell in the second quarter by 0.9%, following a 1.6% decline in the first quarter. Two consecutive quarters of negative GDP growth is the textbook definition of a recession, but the official declaration of a recession comes from a committee that deliberates on the topic and likely won’t make an announcement on the matter for a few months. Moral of the story: Most economists actually don’t expect the committee to consider this an official recession because some of the things impacting this quarter’s negative print (like inventory levels) were more volatile and one-time items than indicative of something more structural. That being said,…

Uh oh Business activity in the US contracted for the first time in two years during the month of July as a big slowdown in our services sectors outweighed the anemic growth we’re still seeing in the manufacturing side of the economy. As measured by the S&P US Composite PMI Output Index, business activity in the services sector fell to 47 compared to the expectations for the index to come in at 52.6 (anything below a 50 here indicates a contractionary environment, while anything above a 50 would indicate growth). This pessimism was matched by the Philly Fed’s regional activity index, which fell deeper into contractionary territory. Moral of the story:…

Inflation Station Inflation, have you heard of it? We got two inflation reports this week – the consumer price index and the producer price index. Typically, the producer price index is a precursor to what consumer prices might do in the future as higher/lower costs get passed from producers to their customers. While we’ve been looking for inflation to start slowing, both prints came in higher than expected. Producer prices increased 11.3% in the last year – 90% of it was driven by higher energy costs. Consumer prices came in 9.1% higher than last year. While food and energy drove a lot of the increase in prices, the inflation is…

Looking for cracks The US added 372k new jobs in June as the labor market continues to remain strong despite everything else falling apart. Economists were expecting only 250k new jobs, so this is one of seemingly few areas right now where this country is exceeding expectations. That being said there are signs in this report of things slowing, which is to be expected given the looming recessionary fears in the market, making employers a bit more cautious about their hiring plans. The size of the labor force fell for the second time in the last three months, which is indicative of hiring slowing or jobs becoming more difficult to…

Negative revisions Economic growth for the first quarter was revised to a -1.6% number, mainly driven by softening in business inventories, government spending, and residential investments though consumer spending helped offset some of that. A big part of the business spending was driven by the big spike in COVID from the omicron wave causing big business disruptions. We also saw government assistance programs expire or taper off for businesses and households. Moral of the story: Two quarters in a row of negative GDP growth is the technical definition of a recession. If we had negative growth in the first quarter and manage to put up negative growth in the second quarter…

Still tight labor market New unemployment claims decreased last week to 229k as the labor market remains strong despite the other uncertainties across the economy. We reached a 53-year low of weekly unemployment claims in March (166k) and have been relatively consistent in the ~200k range ever since. Though there have been reports of job cuts in the tech and housing sectors, it doesn’t seem to have flowed through into the entire labor market. There are still 11.4m job openings, which is about 2 job openings for every unemployed person. Moral of the story: I’ve been trying to find any sort of giveback in the labor market to indicate bigger…