I’ve Seen Enough, the US is in Recession Now, Q&A on Why – Mish Talk
Dot Plot of GDP Outlook from latest FOMC material.
Recession Q&A
Q: Doesn’t it take two consecutive quarters of negative GDP to start a recession?
A: The NBER, the official arbiter of GDP, has no such requirement. Instead it looks at a variety of conditions.
The Pandemic recession did not even have a full quarter of negative GDP. It had two months of recession.
Two consecutive quarters of declining real final sales (not just declining GDP), is a sufficient condition but not a necessary one. A decent slump in Q1, a small rebound in Q2, and a bigger slump in Q3 would likely mark the start of recession in that first quarter, not the third.
Q: Aren’t you looking ahead?
A: Indeed I am. Do you want me to wait until Jerome Powel, President Biden, and Janet Yellen are the last three people on this earth to be in denial?
Q: Don’t you tend to be early on recession calls?
A: That’s true. I have been. I even called for one that didn’t happen, as did the ECRI. But in contrast to the ECRI which denied the 2008 recession after it started, then labeled it “a recession of choice”, I insisted it had started and I was correct.
Q: Aren’t Fed Chair Jerome Powell and Treasury Secretary Janet Yellin still promoting a soft Landing?
A: So what? The Fed has never forecast a recession in history. Former Fed Chair Ben Bernanke denied a housing bubble and a recession after it already started. We see that again right now, by the Fed, by President Biden, and by Secretary Yellen.
Dot Plot of GDP Expectations
Not a single Fed participant forecasts anything less than 1% growth despite Powell repeatedly stressing how difficult a soft landing might be, how risks are skewed to the upside, and how it has no control over food and energy prices.
What a hoot!
Not There Yet
Next 12-18 Months?!
Gee, that’s going out on a limb.
Fed’s “Wisdom”
“No one good at forecasting”
What a hoot. The Fed has certainly proven it can neither forecast inflation nor recessions.
The Fed is so bad, they should stop trying and let the market set rates.
Not Happening Soon?!
Fact Check Wrong
The Atlanta Fed does not “forecast” recessions. Indeed, it stresses that it does not forecast anything although everyone (including me) refers to their “NowCast” as a forecast.
That aside, the true bottom line estimate of the economy is not GDP but real final sales.
GDPNow Latest Release
GDPNow data from Atlanta Fed, chart by Mish.
Real Final Sales is a very healthy 1.7%.
Q: O.K. With Real Final Sales at 1.7% , how can you possibly suggest we are in recession now?
A: I can think and I can look ahead.
Think!
- Retail sales plunged into negative territory, housing is miserable and rates to get much worse.
- The Fed is in huge tightening cycle and rates to stay that way for at least one more big rate hike.
- It takes a while for hikes and QT to work their way into the economy. Yet, retail sales are already negative.
Retail Sales
Please consider Retail Sales Flounder in May With Negative Revisions in April.
The advance retail sales numbers for May were negative for the month and the Commerce Department revised April slightly lower.
Sales dropped 0.3 percent in May. That may not sound like much, but it’s “real” inflation adjusted sales, not nominal sales that drive GDP.
Real Retail Sales
Real retail sales since 2021, data from Commerce Dept via St. Louis Fed, chart by Mish
- Inflation then accelerated and sales have struggled to keep up with inflation. In real terms sales fell from 233,724 to 230,852 from April to May.
- That’s a month-over-month decline of 1.2 percent, using the CPI as a deflator. It’s real, not nominal spending that’s an input to GDP.
Existing Home Sales Skid Another 3.4 Percent in May, Down Fourth Month
Existing home sales courtesy of Trading Economics annotations by Mish
Please note Existing Home Sales Skid Another 3.4 Percent in May, Down Fourth Month
- Existing home sales declined for the fourth month. Sales are down 16.8 percent since January.
- Sales were down 3.4% from the prior month and 8.6% from one year ago.
- Existing home sales are recorded at closing, new homes at signing. May sales reflect March and April’s mortgage rates, not June’s.
The Current Rise in Mortgage Rates Is Unlike Anything in History
Mortgage rates from Freddie Mac via St. Louis Fed, chart by Mish
Scroll to Continue
Largest Mortgage Rate Swings in History
- In 18 months, the year-over-year percentage change in rates went from -27.8 percent to positive 80.4 percent, a swing of 108.2 percentage points.
- The December 2020 decline of 27.8 percent is the largest decline in history.
- The June 2022 year-over-year rise of 80.4% is the largest rise in history.
Monthly Average Mortgage Rate Percent
Mortgage rates from Freddie Mac via St. Louis Fed, chart by Mish
Highest Rate in 11 Years
5.37 percent is not a high rate historically, but it is the highest rate since 5.42 percent in June 2009.
Moreover, one cannot get anything close to that rate now. That’s a Freddie Mac weekly average rate from early June and it is very stale.
New Home Sales Plunge 22.5% In April, 16.6% From Deep Negative Revisions
On may 24, I reported New Home Sales Plunge 22.5% In April, 16.6% From Deep Negative Revisions
We do not have new home sales for May yet, but expect them to be miserable.
Q: What about durable goods?
A: With new and existing housing in a freefall, demand for appliances, cabinets, landscaping, paint, furniture, are all plunging.
Q: Is there any other evidence of declining demand?
A: Yes, plenty. We have seen warnings from Walmart, Kohls, and two warnings from Target about excess inventory and falling discretionary demand.
Target Warns Second Time of Weaker Profit, Bloated Inventories, and Slumping Demand
On June 7, I reported Target Warns Second Time of Weaker Profit, Bloated Inventories, and Slumping Demand
Target said inventory rose 43% as demand for outdoor furniture, small appliances and some electronics declined faster than expected.
Trucking Crash
Need to Store Unwanted Inventory
Q: What About Oil?
A: Good question. We have never seen an oil spike like this one without it leading to recession.
Q: Can the Fed do anything?
A: Not this time.
Not properly taking Fed actions into account is why I have tended to be early on my calls. It also explains my forecast of a recession that did not happen.
Historically, the Fed has acted on slowdowns. It halted QT on a “Taper Tantrum” then reversed course only to resort to massive QE.
But, the Fed’s hands are now tied. It is on a mission to do something about 8.6% inflation, the most in 40 years.
It is not about to reverse course, recession or not. It would reverse course if there is a major credit dislocation, but such a dislocation will not happen outside of recession.
The Fed has penciled in another 50 or 75 basis point hike in July despite obvious economic weakening that it claims not to see.
Q: Is Powell really that ignorant or is the Fed a bunch of liars?
A: I don’t know. Given the Fed’s pathetic track record at forecasting, I can go either way. It can also be a combination.
But bear in mind, the Fed must deny recession is here otherwise it will have a hard time explaining to Team Biden and the progressives that it is hiking into a known recession.
Politics is very much in play here.
Q: What about jobs?
A: Curiously, everyone seems to understand jobs are a very lagging indicator. Yet, they seem to forget that fact when it suits their purpose.
It’s certain that Powell understands lagging jobs, yet even he mentions them.
Form a jobs perspective, I expect this to be a mild recession.
But from a profits perspective and the Fed inability to do anything about the setup due to inflation fears, this can be a prolonged period of economic weakness, even after recession ends.
Q: How about a synopsis?
A: Sure
Recession Synopsis
- Falling retail sales
- Major housing slump, new and existing
- Rising inventories
- Fed hiking rates
- Fed QT
- Wealth impact of declining stock market
- Global supply chain disruptions
- Oil price spike
- War impacting food prices
- Largest mortgage rates swings in history, nearly doubled
- Plunging demand for durable goods
- Trucking recession
- Fed’s inability to spur demand dues to inflation pressures
Not to worry, president Biden says a recession is not here, and no one on the Fed sees anything under one percent growth.
O.K. Believe who you want.
But I have seen enough. A recession has started.
This post originated at MishTalk.Com.
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