So, Where Are We?

Trading Desk

Have you ever been lost in the woods? The first thing you want to know is your exact current position. Once you figure that out, and it may not be easy, then determining your way home becomes relatively simple.

Tomorrow we’ll get the best coordinates of where this economy is, and from there, we may have a better idea of where it is going. The Bureau of Economic Analysis will give their third and final estimate of the economy’s position, the GDP for the second quarter.

Usually, this is a pretty ho-hum event. When economic times are as expected, there is little to see here, no fundamental changes. However, these are not regular times, and there’s always the possibility of surprise.

There are three fundamental questions we’ll want to ask.

First, are we in a recession? It might look like we’re already in a recession to the casual observer. After all, the generally accepted definition of a Recession is two consecutive quarters of decline, or as economists say, “negative growth.” Now, the first quarter GDP had negative growth of 6/10%. And the second quarter preliminary estimate was also minus. So shouldn’t that be enough to call a recession?

Not quite. Those second quarter numbers are preliminary. We’ll have to wait until tomorrow for the third and final GDP estimate. It’s tomorrow’s number that goes in the record book. And is the “official” reading for Q2 GDP.

If it too is negative, that will put tremendous pressure on the National Bureau of Economic Research (NBER) to declare that we are indeed in a recession. Two negative quarters in a row. There is a growing feeling in the country that so much of what comes from Washington is politically motivated. Statistics are manipulated to make whoever is the incumbent look good.

Suppose tomorrow’s GDP comes in negative again. And if the NBER walks away without calling it a recession. Then the perception will be that they are simply fudging to make the President’s economic record appear better than it is ahead of the upcoming mid-term elections.

There is another dynamic here that makes it hard to know where we are: inflation. The level of economic growth is so tiny the difference between growth and recession is less than 2%. And the level of inflation is so significant, around 7 or 8% or more, that the adjustment for inflation will be the absolute determination of recession. The last estimate showed growth in current, inflated dollars of 5%, but inflation of 7%. After inflation, a negative growth rate of nearly 2%.

Unfortunately, that was our economic position 90 days ago. Remember, we’re still talking about Q2 in these reports, which ended on June 30.

However, with this reasonably good idea of our economic position, and granting that it’s dated. Let’s take a look at the path ahead.

The first obstacle to note, our most significant trading partner, China, has just announced a severe decline in their economy. Chinese GDP just reported down more than 2 1/2% for the quarter. The slower Chinese economy will have an impact on US exports. China is a primary market for US Goods. Even more significant all of those “Supply Chain” issues return with a vengeance. Indications are that China is going through another Covid lockdown, meaning that materials, components, and supplies will become difficult to source.

On the other side of the globe, Europe is reporting very tepid growth. They’re facing the worst energy crisis since World War II. The chance of a European Union recession is incredibly high right now. And like China, a European economic decline would affect both US exports and Supply Chain.

Finally, the US will hold its mid-term elections in just over a month. If we can believe current voter surveys, there is the potential for a significant change in Washington. The most likely change is in the House of Representatives, the originator of all tax and budget policy. With President Biden promising higher corporate tax rates, he would be in direct conflict with a newly positioned house. A Republican-controlled House would likely result in significant budget and tax battles.

Overall much rides on tomorrow’s reading of GDP, with profound implications for both the economy and US Politics.

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David Reavill

David Reavill writer + finance +iconoclast + hiker + Pennsylvania #valueside daily podcast + medium + meditate valueside.com/links