Thursday, July 28, 2022

When is a declining GDP not a recession? In very weird times

Well, is the "R" word now a reality in America? Let's check today's GDP Report and find out!

Oh, noooooo! Two straight quarters of declining (real) GDP growth, that must mean the economy is in recession. All the books tell me so, and I'm sure the pros agree.

As proof of that, the US gained 1.1 million jobs in the Q2 that allegedly had negative growth. And while jobless claims are off their 50-year lows, they are still barely above 250,000 new claims a week - well below the 350,000-400,000 a week that has presaged recessions over the last 40 years.

So what's a good paralell to our current situation? I think this explains it well.

And what happened back then? A transition from a prior wartime economy to a post-war economy, and one that had almost over-full employment with a gap in the amount of available workers and supplies to keep up with the high demand. This needed some sorting out, but was also a very strong time for the economy overall.

Feels pretty similar today, doesn't it? That high 7%+ nominal GDP doesn't seem as likely to go down as much as inflation seems likely to do, given how gas and home prices are correcting. I was also grabbed by the reality that consumer spending still topped the level of inflation for Q2 2022 - +1.0% real increase, and +4.1% for services. Consumers adjusted their habits to the higher prices of goods by not getting as much food at home and gasoline, but still spent more in other areas.

And reports from this week show higher levels of new manufacturing orders and higher inventories for June, along with a declining trade deficit for goods. That's the direct opposite of a "high-inflation + recession" scenario.

So my thoughts? If this is a recession, it's the oddest, least-painful one I can recall. One with job growth, consumer adjustements and shortages instead of a need to cut back on the business side. We'll see if things start to level out in July and for the rest of Q3.

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