GDP SURPISED ON THE DOWNSIDE

According to the NBER (National Bureau of Economic Research), a recession is defined as two consecutive quarters of negative GDP.

The government reported yesterday the economy contracted by 0.9% during second quarter, versus an expected expansion of 0.4%.  This follows first quarter’s contraction of 1.6%.  Based upon the NBER, the economy is now in a recession, perhaps the most forecasted recession in history.

Nominal GDP or growth before accounting for inflation rose by 7.8%, the greatest nominal growth in over a generation according to Goldman.  The GDP Price Index rose by 8.7% versus an expected increase of 8.0%, thus real GDP contracted by 0.9%.

In other words, this is textbook boomflation…strong nominal GDP but even stronger inflation that produces negative GDP.

Several times I have referenced a dated St. Louis Fed report suggesting that if monetary velocity accelerates to 50% its norm, both nominal GDP and inflation would be “double digits” perhaps creating environment similar today where inflation outstrips the growth.

To describe today’s GDP data differently, if wages are up 5% and inflation is up 7%, purchasing power declines by 2%.

A boomflation environment historically occurs in a developing nations’ not necessarily in developed industrial ones.  It has been at least two generations that the US has faced a similar environment.

An issue at hand the inflation is being fed by the lack of supply, partially the result of COVID, Ukraine, and a host of other factors.

Will inflation decline to the Fed’s 2% speed limit in the intermediate future?  The report indicated the change in inventories subtracted 2% from GDP.  This is historically economically bullish for these stores must be replaced.

And then there is the $52 billion “chip bill” that has perhaps morphed to over $250 billion.  How will this additional stimulus impact the economy?

Reported yesterday “Build Back Better Bill” was unexpectedly rebirthed and is now called the “Inflation Reduction Act” which would reportedly “invest” $433 billion in climate initiatives.  [Note:  The bill is forecasted to reduce the deficit by $300 billion via “increased revenue streams. of $739 billion”]  While the amount has been greatly reduced from the initial $3.5 trillion price tag, it is still further stimulus.

As with the “chip bill,” the “Inflation Reduction Act” bill is not funded.  The country is borrowing yet even more money to pay for the legislation.

Hypothetically, aggregate demand, the result of inventory rebuilding, the chip bill and Build Back Better, should increase not decrease.

Volumes will be written as this unfolds, with the result perhaps the one that no one suggests.

Potentially millions will be made and lost as the economy “re onshores” its methods of production to ensure availability of product.  Yesterday’s environment of “price is the only determinate of a purchasing decision” has died an inglorious and quick death, perhaps replaced by “availability is the only determinate of a purchasing decision.”

Commenting on yesterday’s market activity, equities rose about 1% to a seven week high perhaps under the guise the Fed might not have to be aggressive as once believed.  The Treasury curve steepened.

After the close, AAPL, AMZN and INTC reported.  AMZN was interpreted as positive causing shares to rise about 10%, INTC negative causing shares to fall about 9%.  AAPL also met expectations, sending shares nominally higher.

Last night the foreign markets were mixed, London was up 0.39%, Paris up 1.24% and Frankfurt up 0.93%. China was down 0.89%, Japan down 0.05% and Hang Seng down 2.26%.

Dow and NASDAQ futures are up 0.25% and 1.0%, respectively because of recent profit reports.  It will be the best month for equities since November 2020.  The 10-year is off 7/32 to yield 2.70%.

 

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