Is This A Recession Or Not? Most Of The Details Say 'Not Yet!'
Summary
- Last Thursday, the Commerce Department announced its preliminary estimate for second-quarter GDP growth at an annualized decline of -0.9%, which marks two consecutive quarters of negative GDP growth.
- The Commerce Department announced on Wednesday that durable goods orders increased a healthy 1.9% in June, due largely to a 5.1% surge in transportation orders from the automotive industry.
- Food prices could also decline soon since exports could resume soon from Ukrainian Black Sea ports due to a deal between Russia and Ukraine.
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Last week, I wrote, “If this is a recession, it’s the strangest one I’ve seen,” but that doesn’t mean I want to change the definition of a recession. I just want to see the whole economy, not just one statistic.
Last Thursday, the Commerce Department announced its preliminary estimate for second-quarter GDP growth at an annualized decline of -0.9%, which marks two consecutive quarters of negative GDP growth. This is the standard definition of a recession, but my first caveat would be that this first (of three) GDP estimates is often a “wild guess” that may be revised upward within the next two months.
Secondly, you have to look at the components that make up the GDP. Some involve growth, while others are accounting details. For instance, Treasury Secretary Janet Yellen said at a press conference last Thursday that the U.S. economy is not in a real recession, since the main reason that second-quarter GDP declined was a change in private inventories that shaved 2% off the quarterly total. Yellen added, “Job creation is continuing. Household finances remain strong. Consumers are spending, and businesses are growing.” In conclusion, Yellen painted a picture of an “inventory recession” versus a “real recession.”
In addition, I would add that there is no “earnings recession,” even though economic growth has slowed dramatically. The U.S. economy is still creating jobs instead of creating massive layoffs – which would be normal in most recessions – so the more realistic “boots on the ground” consumers and the analyst community are right, while the ivory tower theorists in their doomsday dreaming are wrong. I’d say that as long as consumers have money in their pockets, they will keep spending and avoid any deep recession.
Many of the statistics released last week sounded downbeat on the surface but had a silver lining. On Tuesday, for instance, the Conference Board announced that its consumer confidence index declined to 95.7 in July, down from 98.4 in June, but the big drop was in the “present situation” component, which declined to 141.3 in July, down from 147.2 in June. But, if you look to the future, the “expectations” component declined only slightly to 65.3 in July from 65.8 in June, so consumers are becoming hopeful.
Also on Tuesday, new home sales declined 8.1% in June to a 590,000 annual pace, which is below pre-pandemic levels. In the past 12 months, new home sales have plunged 17.4%. Even worse, the inventory of new homes for sale rose to a 9.3-month supply at the current annual sales pace. At the peak of the housing bubble, new home sales hit a 1.4 million annual sales pace, so new home sales are now running at only 42% of peak annual sales. Also, pending home sales declined 8.6% in June and according to the National Association of Realtors, signed contracts to buy homes declined 20% in June compared to a year ago. Due to higher mortgage rates, demand for homes has fizzled and the housing industry is in a slump.
All that sounds dismal, but the silver lining is that market rates are falling, so mortgage rates will likely follow 10-year rates down. In his press conference after the FOMC meeting on Wednesday, Fed Chair Jerome Powell was more dovish, saying, “At some point it will be appropriate to slow down … We might do another unusually large increase (on September 21st) but that is not a decision we’ve made at all; we’re going to be guided by the data.” Translated from Fedspeak, falling Treasury bond yields as inflation cools could cause the Fed to stop raising rates after its September FOMC meeting. Furthermore, a 0.5% vs. 0.75% rate hike is possible on September 21st and that “surprise” could cause a big stock market rally.
In a welcome piece of good news, the Commerce Department announced on Wednesday that durable goods orders increased a healthy 1.9% in June, due largely to a 5.1% surge in transportation orders from the automotive industry. Excluding transportation, durable goods orders still rose 0.3%. Unfilled orders rose 0.7%, so order backlogs continue to grow. May orders were revised up to a 0.8% increase. Durable goods orders have risen eight of the last nine months, so the manufacturing sector is healthy.
On Friday, the Commerce Department reported that the Fed’s favorite inflation indicator, namely the Personal Consumption Expenditure (PCE) index rose 1% in June – the biggest monthly increase since February 1981. In the past 12 months, the PCE has risen 6.8%. The core PCE, excluding food and energy, rose 0.6% in June and 4.8% in the past 12 months. The Commerce Department also said that consumer spending rose 1.1% in June, slightly more than the PCE inflation pace. Another positive sign was that the employment cost index rose 1.3% in June, signifying that wages have exceeded inflation. This is not indicative of a recession, so the Fed will likely raise interest rates once more in September.
The Commerce Department also reported on Wednesday that the trade deficit continues to decline, by 5.6% in June, the third straight significant monthly decline. U.S. exports rose 2.4% to $181.5 billion, while our imports declined 0.5% to $279.7 billion. The U.S. trade deficit is now at its lowest level since last November, aided by higher exports of crude oil and refined petroleum products. The trade deficit has a big impact on GDP growth, so the fact that it has been rapidly shrinking is an encouraging sign.
The final bit of news on Thursday was that the Labor Department reported that weekly jobless claims declined to 256,000 in the latest week, down from a revised 261,000 in the previous week. Continuing unemployment claims declined to 1.359 million compared to 1.384 million in the previous week. Overall, the jobless claims number was encouraging, especially continuing unemployment claims.
In summary, the balance of last week’s indicators is that we are nowhere near a normal contraction.
Some More Good News – Not Widely Reported
Bad news sells, so these positive stories haven’t gained much traction in your daily news yet.
- Domestic crude oil production is now back to 12 million barrels per day, the same level as back in 2019. Since demand dropped due to higher prices at the pump, the U.S. is now energy independent once again and we are exporting crude oil and refined products. As a result, gasoline prices should decline and the U.S. trade deficit will keep declining significantly due to petroleum exports, which is great news for GDP growth this quarter.
- Food prices could also decline soon since exports could resume soon from Ukrainian Black Sea ports due to a deal between Russia and Ukraine. This deal also allows unimpeded access of Russian fertilizers to global markets. Russia is a major producer of fertilizers, which are vital to maximizing food production, and the cost of fertilizer has soared due to the Ukrainian conflict. Hopefully, this agreement will eventually lead to a ceasefire between Russia and Ukraine.
- 10-year Treasury yields peaked at 3.49% in mid-June and have come down to 2.67% as of the end of July. The U.S. dollar has also recently peaked, but it is still hovering near its highest valuation in 20 years. A strong dollar puts downward pressure on most commodity prices, since commodities are priced in U.S. dollars. Due to a run on Chinese banks, no real yields in Europe or Japan, and weaker economies around the world, the U.S. remains an oasis in a chaotic world.
- Big U.S. political changes are coming in about three months, after the mid-term elections. Political “gridlock” will likely return, which is exactly what the stock market wants to see.
I hope you feel good about America. No matter what our faults or divisions, we are in much better shape than the rest of the world. Even though our central back is raising rates to combat inflation, be thankful they can do that! Other central banks cannot raise interest rates due to their high debt burden.
Our stocks have firmed up immensely and are now enjoying a second-quarter earnings-fueled rally. As always, we are “locked and loaded” with stocks that boast accelerating sales and earnings momentum, so I expect a great second-quarter announcement season. Normally it can get “bumpy” in the late summer, but the market got so oversold that I do not expect much profit-taking after second-quarter report season.
In the end, stock markets like to “react” first and “think” later (if at all). Fortunately, four times a year the stock market must think and evaluate during every quarterly announcement season. This time around, our stocks are clearly an oasis as emerging market leaders. I expect a big cyclical market rally to commence no later than early October, but the party has already started for many of our stocks, so enjoy the ride!
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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