I used to coach age group swimming. And for those not familiar with the sport. I usually had between 50 and 100 swimmers aged 8 to 12 years. And each time we went to a swim meet, we had to make sure that we returned home with the same number of swimmers we took to the meet.
So, we’d count. Now you understand what it’s like to count a hundred squirming, wiggling age groupers. They could not stand still if their life depended on it. Athletic kids, nervous about their upcoming race, have to move. And so, getting an exact count is extremely difficult. Often it would take two or three counts by a couple of coaches or more until we were satisfied we had the correct number.
Our count of age group swimmers is analogous to …the task that the US Bureau of Economic Analysis has to do each quarter. They are measuring, counting, if you will, this $21 Trillion US Economy. This is called the nation’s Gross Domestic Product, the GDP.
By tradition, the Bureau measures the Economy three times after the quarter ends. After the latest quarter closes, it releases those results for the next three months.
The first measure of GDP is a big picture view of how things look. They take in the necessary items they feel are most important. And then make certain assumptions about how the rest of the Economy looks.
Later, in the subsequent revisions, they go back and see if those assumptions were correct or if they need to be revised.
Yesterday was the third and final revision of the GDP as of March 31st. Three long months ago.
What we see here, then, is a process. It is an ongoing, never-ending measure of current economic performance. Now, each analyst is highly familiar with their sector of the Economy. The retail sales analysts, for instance, would feel very comfortable with the sector’s status almost up to the minute.
And yet, you’ll note that in this last revision of the GDP Report, the most important number, the overall growth rate was off.
The Bureau estimated that the Economy only declined by 1.5%. This time they had to mark it one tick lower, minus 1.6%. That may not seem like much, but remember that the last 1/10th% is 1/10th% of 21 trillion. It’s not inconsequential.
And believe me, these analysts take their job very seriously. To miss an estimate by 1/10th% top line is a huge deal.
What’s even worse, this was the second time they were off. The Bureau’s Estimates were even higher a month prior. Initially, they estimated the Economy declined by just 1.4%. Yesterday they revised that to a 1.6% decline.
I think the reason for this adjustment is that the Economy is declining even faster than projected. Remember those assumptions? I’m sure that the Bureau felt they were reasonably steady when the reality was that they were sinking — and sinking much faster than projected.
Let’s look at the three components of income in the GDP Report.
First personal income and spending showed that we all have much less “fun” money. That disposable income we used to buy whatever we please. The skyrocketing cost of living seems to be taking a more significant chunk of our paychecks.
With costs of food, housing, and energy rising. At the same time, our savings are declining. There were no surprises here. However, the rate of change is higher than they thought.
Next, the huge surprise, corporate profits took a big hit in the first quarter. Now, your profits declined only slightly if you worked for a company that sold goods, like a grocery store or gas station.
The financial sector suffered a massive decline. The banks, brokers, and insurance companies saw their collective profits decline by over 9%. A large part of the lower overall revision of GDP.
Finally, I’m sure that you’ll be pleased to learn that our friends over there in government are going just fine, thank you.
The government continues to increase spending in a sea of red ink, where everyone is tightening their purse strings. Government is the only sector that continues to spend. And this is especially true for the state and local governments.
It is comforting to know that while the rest of us may slide into recession, government workers continue to thrive.
Overall, this latest report on the nation’s Gross Domestic Product may help us put together the puzzle pieces of our current Economy.
From my point of view, the two principal issues to focus on as an investor are
There is a significant decline in personal disposable income in this revised report. Not only reducing the funds available by the public to save and invest. It also negatively impacts retail sales and other major disposable items such as automobiles, electronics, and other luxury goods.
This revision’s second major red flag is the overall decline in corporate profits. Many analysts consider corporate profits to be the driving force behind the stock market, with a 9% decline for the financial sector. This profits slide goes a long way in explaining the market’s current weakness.
We close out the books in the First Quarter of 2022. On July 28th, we’ll get our first look at GDP for Quarter Number Two in less than a month.
It looks like China is putting that recent lock-down behind them. You may remember that China instituted a zero Covid Policy just a few weeks ago. And as a result of that policy, China closed many of its major ports in and around Shanghai.
Well, that policy, as you know, has been lifted, and last night we got the first real indication that industry and manufacturing are coming back to life. The Purchasing Managers, are always the first step in the production process, the Purchasing Managers are buying all the raw materials and components that the Chinese Industry needs to go back to work. It’s good to see Chinese Industry back online, and this will go a long way toward reducing shortages here in the USA.
Back here in the States, in just a few minutes we will get the latest on Personal Income and Spending. Always a good review of how the Average American sees the economy. As you know we’ve seen a deterioration in Consumer Sentiment in the past two weeks, and that is clearly reflected in how Americans are spending. It’s expected that spending in May declined, in spite of the fact that Incomes were likely actually higher. In an uncertain future, American’s simply want to tuck some of that income away for a rainy day.
Also reporting today will be the latest Initial Claims for Unemployment, expected to show little change. And then the Federal Reserve’s favorite measure of inflation. The Personal Consumption and Expenditures Price Index. This is the one to watch today, as any big rise in inflation would be one more reason for the Fed to hike Interest Rates.
We’ve had a number of companies report earnings this morning. On the positive side so far, adult beverage maker Constellation Brands, snack maker: Simply Good Foods, and the big mover, lighting maker Acuity Brands. Reporting later this afternoon from the west coast will be tech giant Micron Technology.
Have a great day!