There is a lot of debate about whether or not we are in recession because we have had two negative GDP numbers in a row, -1.6% and -0.9%. There is a board that declares a recession and it has a series of criteria it looks at.
This situation is very convoluted. First, the Q 1 decline was after a 6.9% 4th Q GDP. Historically, extreme increases in GDP quarters are ones followed by a decreased in the level of growth which was not sustainable.
The second quarter -0.9% was hit by a several point cut in inventories. The consumption rate was positive.We experienced a minor inventory drag.
Several observations !!! In the first half of the year there were over 2,million new jobs created. Recessions are normally characterized by job losses.
In this unusual world, while the real GDP was negative, the nominal GDP was over 10% in Q 1 and over 8% in Q 2. The extreme levels of inflation distorts perceptions.
I use the gross example of FDX's last quarter, which reported 11% growth in sales, 11% negative units and 22% increase in prices. The stock went up.
My perception is that we had a high operating rate Q 1, but a let down from an extreme rate in the 4th Q. Also, real growth was a minor 0.9% dip in Q 2 because of an inventory run off from an over exuberant increases in previous quarters. Consumption was still reasonable.
The good news is I don't think we had a recession in the first halt. The bad news is that think the odds of a recession ahead is 60% to 70%.
There are many clear signs of a slowdown developing. The latest example was a 600,000 decline in job openings in June in the JOLTS report. It is going to be interesting to see the next report. Was the June report a burst that will cool down or will it get even larger in July and future months?
The real wild card negative is the plan by the Fed to sell assets at a $94 billion a month rate, over a trillion a year!!! This will shrink money supply. The plan is for two years. I don't expect this to be carried out fully.
The last QT was at a much smaller monthly rate, $50 billion, in 2018. We had a sharp decline in stocks in late 2018.
"The Fed had to end its first QT program in September 2019 after the declining size of its balance sheet contributed to a crisis in overnight lending markets."
It never reached a trillion in the whole program.
Another observation is that cutting inflation is going to help some companies, but will make life complicated for those that overly benefited from raising prices. Overall profit margins in total are likely to get squeezed a bit. It will be on a company by company basis. (What will Fed Ex do??)
Net We are in uncharted territory coming out of the biggest increase in money in our history.
We are still benefiting from excess money floating in the system. Those guys are going to try to take $2 trillion out of the punch bowl. Hmmmm
Jerry