Recession Outlook Update, Where Do Things Currently Stand? – Mish Talk
GDPNow data from the Atlanta Fed, Chart by Mish
The latest GDPNow Forecast for the second quarter of 2022 stands at 0.9 percent as of June 8.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is 0.9 percent on June 8, unchanged from June 7 after rounding. After this morning’s wholesale trade release from the US Census Bureau, the nowcast of the contribution of inventory investment to second-quarter real GDP growth decreased from -1.61 percentage points to -1.62 percentage points.
Wholesale Inventories
Today’s Wholesale Inventories Report showed inventories rose 2.2% in April and an upward revision to 2.7% in March.
Q: Why did the GDPNow inventory estimate remain unchanged?
A: Because the that is what the model expected.
Expectations vs Model
Many people were shocked about the model decline from 1.9% to 1.3% on June 1 despite a much stronger than expected (by economists) ISM report.
I explained that it was not the reported number that mattered but rather what the reported numbers do vs. what the GDPNow model expects.
Q &A With GDPNow Creator Pat Higgins
Mish to Pat Higgins
Hi Pat. I see that GDPNow took a dive following ISM data.
Many questioned that, but I explained it’s not the data that matters but what the model expected vs the data.
Can you tell me what the downward surprise to the model was in light of the “beat the street” IMS report?
Pat Higgins Reply
Hi Mike,
There is not really an easy way to translate what the model was expecting for the ISM Manufacturing data with the actual release. In addition to the composite index, the model also includes the employment, inventories, new orders, production, and supplier deliveries subindexes.
On May 27th, the May and June 2022 values are forecasted based on the factor estimates through April. On June 1st, the model uses the ISM Manufacturing data [and all of the lagged data] to estimate the factor for May and then uses the factor estimates through May to forecast the June factor value.
There was also a construction spending release on June 1st that directly impacted the residential, nonresidential structures and government spending forecasts. The construction spending data does not impact consumer spending directly, so the change in that forecast gives a partial, probably understated, estimate of how the change in the factor estimate impacted the forecast.
Where Do Things Currently Stand?
Recession Watch
You cannot really average one quarter of GDP to current estimates to see where things stand.
It’s better to average two quarters of real final sales, the true bottom line numbers for the economy. The rest is inventory adjustment which nets to zero over time.
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%.
Scroll to Continue
If we average -0.4% with the current forecast of +2.5% we are not close to recession.
But that assumes the current GDPNow forecast is accurate and retail sales hold up.
I doubt both and so does Booth.
Target Cuts Vendor Orders
Target Warns Second Time of Weaker Profit, Bloated Inventories, and Slumping Demand
Yesterday, Target Warns Second Time of Weaker Profit, Bloated Inventories, and Slumping Demand
Auto sales were dismal.
Code Words
New Home Sales Plunge 22.5% In April, 16.6% From Deep Negative Revisions
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.
One of the things Target mentioned was a huge drop in demand for appliances.
Target forgot to factor in what rising mortgage rates would do to demand for houses and everything that fits into them.
Looking Ahead
Looking ahead, new and existing home sales will be negative on demand for appliances, furniture, durable goods, landscaping, kitchen cabinets, etc.
We are one retail sales revision away from a second consecutive quarter of negative real final sales, the true bottom line GDP number.
I repeat my previous comment: Judging from the retail warning from Target, Walmart, and Kohls, we may not even need that revision.
This post originated at MishTalk.Com.
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