June 3, 2022

GDP Now Flashes Red.

One of the best tools for any investor is the GDP Now Model, produced by the Atlanta Branch of the Federal Reserve.

This is an absolutely objective, strictly by the numbers, big-picture of the US Economy.

And that's one of the things that I really like about GDP Now. These are no hunches, no wild estimates about where people would like things to be. It's just the numbers. And sometimes the numbers are cold and hard.

It's also produced in near real-time. With reports coming out 3 or 4 times per month, nearly every week.

Now before we begin looking at the model. A word of caution. GDP Now speaks only of annual GDP. Not quarterly.

So, in the last official report on GDP, issued at the end of each quarter, we got to see both annual and quarterly numbers. Not so for GDP Now, as I say, it only talks in terms of annual numbers.

So, let's take a brief recap of where our economy has been. And here I'm going to round off numbers.

We closed out 2021, with GDP growing at a truly remarkable nearly 7% per year. As we noted at the time, this is one of the highest rates of growth for this country in at least a couple of generations.

A really big deal.

Unfortunately, that didn't last long. By the first quarter of this year economic growth was cut in half. And actually, the first quarter's growth rate was negative.

So growth peaked in the fourth quarter last year and then started sliding.

However, up until a couple of weeks ago, it looked like, from the model's point of view, we had turned things around. And the model started to show pretty good growth.

Climbing back to near it's the historic trend. Growth of about 2 1/2%. Not great, but a heck of a lot better than the first quarter.

Then something started just a couple of weeks ago. Down the roller coaster, we go again. The growth rate plunged by a third. To levels seen only at the bottom of last quarter.

In looking at the numbers I see two possible causes. The first is the emergence of weakness in the residential real estate area. With all of the subsidiary home improvement spending showing some decline.

And the second, which will come as no surprise to you I'm sure, is the rising cost of gasoline specifically. All though all energy costs are rising, it's gas that's hurting the most.

With gas in California for instance, the state with the most number of automobiles, California is now seeing gas selling for well over $6 per gallon. An unimaginable number just a couple of years ago.

Gasoline and housing put those two contributors together, and you have a likely explanation of why the economy is slowing.

What's perhaps most startling about the GDP Now Model, is how at odds the model is with our economic leaders.

The Administration continues to insist that this is a very strong economy. Which continues to grow.

While the Federal Reserve, as we discussed yesterday, is seeking to slow down the economy, in its effort to curb inflation.

GDP Now cautions that the economy is already slowing. Likely the result of high energy costs, combined with a weakening real estate market.

Someone is blowing smoke.

And my guess is it's not the GDP Model.


Today's Economic News


You may have heard Energy Secretary Jennifer Granholm declare that drivers will have to pay at least $4 for a gallon of gas for “the foreseeable future.”

A little later in the day, we got to see the data that was behind Granholm's comment. For the 9th week in a row, Gasoline stocks in this country have declined. In total, we've drawn down 20 million barrels more oil than we've produced.

Not a good sign for anyone looking for a break in these high gas prices.

We're seeing the final readings from the Purchasing Managers for May. And across the globe, things are looking very positive, with readings on the Purchasing Managers Index above 50.

Last night we had positive readings from Japan and India and down to South Africa. Three European Countries, Italy, France, and Germany also reported positive PMI results.

In fact about the only country with a less than positive Purchasing Managers Index was Russia. Which came in with a PMI of 48.

However, that represented a 4-point jump for Russia, and it looks like Russia will also turn positive in June.

In a couple of hours, the US will report its own PMI, also expected to be solidly positive.


Also on the calendar, this morning will be the latest reading on unemployment for our country. The Street is looking for a 3 1/2% unemployment rate. Back down to the level we were at before the pandemic.


But the surprising number will likely be the payrolls. Expectations are that the economy only added about 325k jobs in May. And while positive, still its the lowest number of new jobs added for a little more than a year.


There are no major companies reporting earnings today.


Have a great day!