July 29, 2022

Why This Weak Economy Came As Such A Surprise

Back in the 1980s, there lived a most unlikely sportscaster. Howard Cosell, a lawyer by training, was raised in New York. I doubt that Howard ever passed a football or ran a cross-country race. He was an ungainly figure. Yet he became one of the most popular announcers of his era.

At times Howard could be particularly acerbic. Taking to task the many football teams he covered. Whenever he delivered a ruthless assessment, he said he was just: “telling it like it is.”

Calling it as he saw it, not afraid to tell the unvarnished truth. No matter how many egos he might bruise in the process.

And that’s what his many fans appreciated about Howard. Many of us, myself included, failed to realize just how powerful that statement was. There is an art to “telling it like it is.” Something cathartic, in total honesty. He was getting it out there so all the public could see reality.

I particularly appreciate this characteristic of Howard’s today. Because we have become a nation where seemingly no one “tells it like it is.” Today our country is surrounded by those who “tell it like they want it to be.” Not a truthful evaluation of how they see the world. But a fantasy, brought to you to elicit a response. To put into your mind the world, they want you to believe.

We saw that most vividly when the Bureau of Economic Analysis, the official agency that measured the nation’s economy, announced that our GDP had declined in the latest quarter.

Declined? How could that be? Our leadership class, from the President on down, had told us for months that this was a strong economy. That everything is hunky dory. All is well, thanks to their bold leadership.

But you and I know better. We’ve learned better since inflation took off nearly a year ago. I can tell you that things have been tight around this household since the cost to fill up my truck went from less than $30 to $100. That was a real hit in the old wallet. And a wake-up call that all was not right financially in America.

As much as we hate to admit it, these past couple of years have been tough financially.

And we’re not alone in seeing how weak this economy is. It is apparent in all the data. The Atlanta Branch of the Federal Reserve maintains an excellent model of the nation’s GDP, called the GDP Now Model. I refer to this often because it’s one of the few places to get a clear, unbiased assessment of the economy.

Real GDP Blue, GDP Now Model Red

As you can see from the chart, throughout nearly the entire second quarter, GDP Now has been screaming that the economy is underwater. It is not expanding, and it is contracting. At the end of the quarter, GDP Now forecasts that the economy had declined by 1.2%. That’s just 0.3% above the first estimate of GDP by the Bureau of Economic Analysis, the official arbiter of GDP.

This economic contraction marks the second quarter in a row that GDP has fallen into negative territory, the traditional indication that the country is in a recession.

Yet, despite that fact, the Federal Reserve chose to raise interest rates. And not a little, but by 75 basis points. A substantial interest rate moves at this level. It is unprecedented. I cannot recall the Fed raising interest rates when the economy was in recession.

Then why did the Fed take this action? We all know the answer: to preserve the narrative, the fiction that this economy is healthy. After all, we wouldn’t want our esteemed leaders to be seen in a bad light.

Today everyone seems to be political. Putting a spin on all we read and hear.

When what we need is an obnoxious little man sitting in the corner:

“Telling it like it is…”

Economic News

In the past day, we’ve had six countries report their latest GDP growth rate. This past quarter has been a particularly difficult one as countries must manage the twin problems of energy prices and inflation.

In looking at these relative economic growth rates it’s clear that the United States is beginning to underperform the rest of the world. Of the countries reporting, only the US reported negative growth. However, Germany wasn’t far behind with zero growth. France reported that their GDP for the quarter rose 1/2%, Italy and Mexico’s GDP up 1%, and Spain up 1.1%.

Incidentally, China is not far behind the US in reporting poor results. To me, it is becoming more and more apparent that in today’s environment, the key to economic growth is energy management.

Today we will get a detailed look at the US Consumer. We are beginning with personal income and spending. Analysts look for improvement here, and if this plays out, it should be a real boost to the economy.

Also, we’ll get a look at the Fed’s favorite measure of inflation, the Personal Consumption Expenditures Prices, a measure of the actual spending of consumers.

And finally, the latest survey by the University of Michigan of Consumer Sentiment. Remember that last measure; this index hit a record low.

In earnings today, positive results from our two big integrated oil companies, Exxon Mobile and Chevron. As well as positive results from pharmaceutical company Abbvie.

While Procter and GambleAstra Zeneca, and Sony Corporation are all trading lower.