Took a break from market commentary this week. Feel like this “are we in a recession or not” dead horse can only be beaten so much. That being said, I took a few swings below.
We are slowing down
There’s this idea that a recession is defined as two consecutive quarters of negative economic growth. Thanks to Thursday’s GDP report, pundits are jumping all over the opportunity to officially call it.
Definitions like these have always confused me. It’s like a correction is a drop of 10% from a peak, and a bear market is 20%. What committee is tasked with defining these? Is it the same dark circle that determines what’s fashionable this season and what’s out?
In this instance, the government tells us that the National Bureau of Economic Research (NBER) officially calls recessions. From what I can tell, that decision is more qualitative than quantitative.
Because if it was as easy as taking two consecutive negative numbers, they’d have already called it by now. It’s super simple. Take the last two prints, see if there is a negative sign in front of both numbers, and if so, issue the press release. A trained chimp could do that.
But that’s not how it works. The NBER is notoriously late to the party, and that’s because calling recessions is tricky because the data keeps changing, and headline numbers never tell the whole story.
Case in point, I wrote the following back in April about the 1Q print:
The headlines around the 1Q 2022 GDP are creating a confusing picture. Real GDP, or GDP minus inflation, came in at -1.4%, but that in no way implies a recession.
Dig deeper, and the story changes. Consumer spending increased by 2.7% (annualized), business fixed investment soared by 9.2%, and home building came in at around 2.1%. Nothing about these numbers indicates recession.
So what happened?
First, GDP dings the U.S. economy for importing more than exporting, and imports surged. The idea is that if Americans rely more on what the rest of the world sells than what is made here, our economy should be penalized. I get why some think this way, but I believe that consumer and business spending is way more important to the economy than where goods originate. Sure, buying American from a GDP perspective is better, but that’s a distant second to actual spending.
Second, inventories slowed down. That means companies are buying less stuff to put on their shelves, which makes sense to me. Hoarding has been rampant over the last year, and that’s not real demand. So, this slowdown seems more of a normalization than any indication of customer demand falling apart.
Third, these numbers will be revised several times before they get set in stone. Admittedly, this could go either way, but my point is that measuring GDP takes a long time, and there’s no reason to jump to conclusions just yet.
There is zero; I’m talking zero case to be made for a recession when spending was that hot in 1Q.
Moving to the report this week, which came in at a decline of 0.9% for 2Q, there’s also a lot going on underneath that headline number. For example, inventories continued to be weak (real GDP would have been positive had inventories not fallen by 2%), but manufacturing is growing 5%, and there are still two jobs available for every person looking.
That being said, parts of the economy are slowing down. Spending, housing, construction, and business investment are all weaker, which is precisely what we want to see. The gains from 2020/21 were fake – fueled by stimulus checks and insane monetary policy – and this has to normalize.
Said another way, the economy got drunk in 2020/21, and now we’re feeling the onset of the hangover. Sure, it may be a little painful, but it’s what’s needed to get back to normal unless this can also be administered economically.
I’d wager this is a big reason why the market ripped higher through the week. Any news indicating that the economy is slowing down appears to be viewed positively by investors because it lowers the risk that the Fed will ignite a terrible recession.
I can’t think of a better time to talk politics than a Friday afternoon in late July when the oppressive heat is already making most of us violently lethargic. But the political fireworks have only just begun.
Spoiler alert: The Republicans will run with this recession story in a big way. Based on polls today, it appears they will take Congress, but they aren’t taking any chances. They want our clients to be as scared and miserable as possible heading into November.
To be fair, the Democrats would do the same thing if the situation were reversed. That’s why the White House and most mainstream media are trying to redefine the word “recession” alongside making decisions like these.
It’s just political warfare from both sides. In fact, here’s a screenshot of top news on Google today when I searched for the “definition of a recession.”
But here’s the thing. If the Republicans take Congress, it’s not like they will act like two Advils and cure this impending economic hangover 45 minutes later. Our government is designed to move slow for a reason, and the checks and balances in place practically assure that nothing will get done for 18 months at best.
Besides, even if Congress could move faster, they have zero control over the Fed, and they’re the only ones who can change the course of this slowdown.
I don’t eat fast food, so I’d never heard of Raising Cane’s before this week. Had someone mentioned that name to me, the first and only thought that would have come to mind was that John Lithgow movie from the 1990s.
But some dude named Joey Chestnut set a new world record this week for eating 44 Raising Cane’s chicken fingers in 5 minutes. This was in recognition of National Chicken Finger Day. Three observations here that are simply shocking.
First, his name is really Joey Chestnut.
Second, here’s a quote from the article:
“As crazy as it may sound, Chestnut kept eating the famous chicken fingers even after the clock expired.”
Try to conceptualize this one. After 44 chicken fingers, he kept going. That’s reminiscent of all those stories of psychos that stab victims like 30 times when only 1-2 would do the trick.
Third, I wonder if the CEO of Raising Cane’s awarded him a mega millions ticket because he apparently just dropped $100,000 on lottery tickets for all his employees. And speaking of quotes, this one from him is stellar:
“Times are tough out there,” Raising Cane’s CEO AJ Kumaran told CNN. “(Employees are) seeing it at their gas stations and gas pumps, they’re seeing it on their grocery shelves … Things aren’t exactly easy these days, so when we saw there is a chance to not only have a little fun, but maybe win a little bit extra money for our people, we wanted to do it.”
HA! The potential cure to inflation and an economic slowdown is a tax on the mathematically challenged? Really? Because the odds of winning are estimated at 1 in 303 million. In aggregate, buying 50,000 tickets to cover all his employees doesn’t change the odds by even a fraction of a percent.
This really is a great time to be alive. Enjoy the weekend…
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