Revisiting history

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 (which just ended), we’re already in a recession. Economists are broadly calling for positive growth in the second quarter but markets are putting a 40% probability of recession next year, driving the worst first half of the year for stocks we’ve seen since 1970. Big yikes.

Stifling demand

The Federal Reserve’s preferred measure of inflation (the personal consumption price index) increased 0.6% in May, mainly driven by higher food and gas prices. The monthly increase was 3x what we saw in April. On an annual basis, the rise in costs was closer 6.3%. This index considers how consumers change their purchasing in response to higher prices like substituting lower price products.

Moral of the story: The Federal Reserve is tightening policy (raising interest rates – you’ve seen that translate into higher mortgage rates, too) and the question is whether they can achieve a “soft landing” which basically means they would be able to reduce inflation without driving us into a recession. Doesn’t seem like that’s likely given we’re probably already there. The issue is that gas prices and food prices are really high because we don’t have enough supply but the central banks can’t control that – the only thing they can do is bring down demand enough to make up for it. Bringing down demand enough to make up for it pretty much will have to drive us into a recession (aka negative demand).

But we still have jobs

Jobless claims continued to climb down last week to 231k. For context, the weekly average in 2019, when we had one of the tightest labor markets just before COVID, was 218k. Though we’ve been hearing lots of examples of big tech companies and other pausing hiring, job postings have been cooling a bit but not really falling off the cliff by any means.

Moral of the story: The labor market still seems to be in really good shape despite everything else happening in the economy. As long as people still have jobs, they’re going to feel more confident in their spending ability. As soon as these jobless claims get to being above 250k on a more consistent basis we’re going to start seeing more signs of slack in the labor market, which will reduce consumer spending even more.

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