Recession Watch Update, Where Do Things Stand After the Huge Fed Hike? – Mish Talk

June 19, 2022

GDPNow data from the Atlanta Fed, chart by mish.

Many people noted the Atlanta Fed GDPNow Model fell to zero growth for the second quarter of 2022.

Given the first quarter was was negative are we in recession? Not so fast. Lots of things are in play, but the most important of which is Real Final Sales.

It’s real (inflation adjusted) sales that drives GDP so the headline number is essentially useless. The GDPNow estimate of Real Final Sales plunged 0.8 percentage points today but is still, for now, a healthy 1.7 percent.

Let’s discuss Wednesday’s retail sales report then attempt to fill in some huge missing lines.

Retail Sales Flounder in May With Negative Revisions in April

Real retail sales data from Commerce Dept via St. Louis Fed, chart by Mish

I expected a poor retail sales report for May and negative revisions and got both.

The Commerce Department reported retail sales for April as +0.9 percent but revised that lower to +0.7%. Then on June 15, the Commerce Department reported May retail sales as -0.3 percent.

But inflation adjusted sales fell a steep 1.2%

For discussion, and numerous charts, please see Retail Sales Flounder in May With Negative Revisions in April

I expected negative revisions because April seemed overly strong after Target, Walmart, and Kohls all reported weak conditions. Target warned Twice.

For discussion, please see Target Warns Second Time of Weaker Profit, Bloated Inventories, and Slumping Demand

Looking Back

On May 24, I noted New Home Sales Plunge 22.5% In April, 16.6% From Deep Negative Revisions

New home sales have peaked this cycle and the bottom is nowhere in sight.

On April 28, I noted GDP Declines 1.4% in First Quarter of 2022 Sounding Recession Bells

Real Final Sales came in at -0.6% for the first quarter. But the BEA adjusted that up to -0.4%.

Still that is negative. Another negative real final sales number would signal recession.

Looking Ahead

Housing data has been dismal and will remain that way.

Mortgage rates plunged at least a quarter of a point following the FOMC decision but that only took the average rate to 6.03 from 6.28%. That’s not going to spur housing.

We still have two complete months of housing data on the horizon (new home sales, and existing home sales).

We have another month of retail sales data, another month of CPI data, two more months of PCE data, and another month of ISM data yet to see.

It’s mid-June and the quarter ends June 30, but about 40% of the data is still not in.

Another Hot CPI?

That’s more likely than not because the BLS is months lagging on where rent is headed.

*National Rent data from ApartmentList, OER and Primary Residence from the BLS, chart by Mish*

For discussion, please see How Far Behind the Curve is the BLS and Fed on Rent Inflation?

It was on that basis of lagging rent data that I expected a hot May CPI report. Rent and OER are 31% of the CPI.

Q: Why Did Economists Blow the CPI Forecast So Badly This Month?
A: Because of rent, food, and gas, things the Fed can do little about.

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Looking ahead, expect the rent component of the CPI to remain strong. If food and energy remain strong, we will see another strong overall CPI.

What Would It Take For a Negative Real Final Sales Print?

Curiously, it’s hard to say precisely other than the data needs to underperform the GDPNow model expectations.

The May ISM data was strong (at least I thought so) yet it took 0.5 percentage points off Real Final Sales and 0.6 percentage points off the baseline GDP because the model expected more.

In essence, we are guessing not what the data will do, but rather what the data does vs what the model expects.

That said, I believe we are going to see some abysmal housing reports, a weakening ISM, and another bad month of retail sales.

If I am correct about the reports (and I am reasonably confident in that) and the model expects higher (I am guessing it will) then we are on the verge of a second quarter of negative real final sales.

My estimate puts a lot of faith in the GDPNow model but it’s been very accurate recently. Yet, that puts another factor in play. If the model has currently overestimated by half a point, then it will take a half-point less to be in recession.

To the above point, note that for quarters on end, the model has started out very strong only to sink as the quarter progresses.

That could easily happen again, even on mediocre as opposed to terrible reports.

What About Jobs?

Mish Comment on Jobs

Not only are jobs lagging, they never recovered from the last recession. So this will not be a repeat of the Great Recession. There are still a lot of leisure and hospitality jobs to fill.

Instead, I primarily expect openings to vanish and hours to be cut. However, there will be weakness in technology jobs and retail sales jobs, so job losses are not out of the question.

Synopsis

The next set of reports will tell the story, especially the June retail sales report.

But in contrast to what the Fed said following the FOMC meeting, the consumer is not strong.

We are a couple of bad reports away from recession and I still expect those bad reports. So I am sticking with my second or third-quarter recession call until housing or retail sales convince me I am wrong.

This is neither the Covid pandemic nor the Great Recession. Job-wise, I expect a weak recession but a poor recovery from it.

Given the Inflation Pressures of De-Globalization the Fed will be unable to act vigorously to stimulate demand fearing more inflation.

Unless home prices crater, higher interest rates will still leave houses unaffordable.

Stocks are likely to get crushed because the Fed will be unable or unwilling to risk another big round of inflation as inflation-adjusted sales and corporate profits remain weak.

The weak stock market will also reduce demand due to wealth effect impact. The wipeout in the crypto space will add to the wealth effect misery.

Following the recession, the Fed will struggle for traction for many quarters. The Fed will have a long period tradeoff between weak demand and triggering more inflation with rate cuts.