Although I have been gray for years, I have been telling people I had chestnut brown hair at the start of 2022. That is how bizarre this year has been in the both the markets and the economy. Folks usually laugh politely at this lame attempt at humor. It seems the bar is pretty low for economics spouting comedians.
This week, the Bureau of Economic Analysis (BEA) announced the US economy grew at a 2.6% annual pace during the 3rd Quarter of 2022. This followed a (0.6%) reading in the 2nd Quarter and an even worse (1.6%) observation for the first three months on the calendar. That would appear to be a pretty sharp turnaround, but was it really?
A ha. That is a very astute question.
Just as the first two quarters weren’t as bad as the headline number, the 3rd Quarter wasn’t as good. Nowhere near it. Consumer expenditures on both durable and nondurable goods fell during the quarter. Residential and commercial real estate starts fell through the floor. Inventory growth continued to trend downwards. Yuck.
To be sure, the entire report wasn’t doom and gloom. Businesses spent a lot of money on technology, transportation equipment, and intellectual property products. Still, when push comes to shove, the reason why the headline number was as robust as it was is our trade deficit improved somewhat. You read that correctly.
During the 3rd Quarter, the United States exported $2.603 trillion (seasonally adjusted at annual rates) worth of goods and services. That was an $86.3 billion improvement from the 2nd Quarter. On the flipside, we imported $3.877 trillion, which was about $70.3 billion less than the previous quarter.
Please understand, the country is still running a massive roughly $1.3 trillion trade deficit. However, the seasonally adjusted $156.6 billion (again, seasonally adjusted at annual rates) swing was enough to add 2.77% to the equation. That’s right. How the BEA accounts for quarterly vagaries in the trade deficit accounted for all of the growth in the US economy last quarter.
That is how the economy can grow nicely during the quarter, on paper, and people still wonder whether we are in a recession. Math. Oh no, there is that dreaded R word, again, recession. But, where are we? Inquiring minds want to know.
Unfortunately, inquiring minds will just have to wait a little longer. The best way of putting it is: “the jury is still out.” While we have had three consecutive quarters of benign economic activity, in aggregate, it is difficult to say the width and breadth all there. By that I mean some economic sectors are suffering more than others, and some aren’t really suffering at all.
Then, there is the issue with the labor market. It would be very difficult for the National Bureau of Economic Research (NBER) to declare an official recession when the jobs data is as strong as it is. After all, the Bureau of Labor Statistics (BLS) has reported the official Unemployment Rate was 3.5% during September. The economy created 263K net, new payroll jobs last month, and there were over 10 million job openings during August.
Admittedly, that latter data point is trending downward. However, the US is a consumer driven economy. When you create jobs, you create paychecks. When you create paychecks, you create consumers. Do you catch my drift?
There are some who would argue the labor market is a lagging indicator because employers respond to past capacity needs by adding headcount. It doesn’t necessarily paint an accurate picture of what future capacity needs and economic activity will be. Hey, the logic is sound. No argument.
However, there are ordinarily some “wobbles” in the monthly payroll data before the economy goes into recession and businesses start reducing staff. At least through September, there really haven’t been any. Job growth has been consistent and persistent. Employers still have a lot of job openings, and business owners are still complaining about the difficulty in finding capable workers.
In short, we likely aren’t in a recession. All the ingredients in the recipe aren’t really present. Even so, the NBER can do whatever it wants to do whenever it so chooses. But if we aren’t in a recession now, when?
Before I answer that, let me ask you a question or two. If it were possible, would you want to know the date you die? That of your spouse? Siblings? Friends? Pets? God forbid, children? What would you do with that information? What could you do?
Personally, I would struggle with it, and eventually decide I wouldn’t want to know. That would be awful. I would count down the days to the big event(s), which would keep me in a permanent state of depression. How could it not? It would be like living your life permanently on ‘death row.’
To be sure, you could argue we already are, and you would be right. However, it is the uncertainty about the certainty of death which keeps us from losing our minds. Perhaps I could make the same argument about recessions.
Okay, perhaps that is a morbid way of making a point. But, you know, Halloween is only a couple of days away.
What if I were to posit the US economy could very easily stagger through several more quarters like the previous three? It is very easy to contemplate straddling the line between growth and contraction through the middle of next year. There is nothing in the crystal ball to suggest a sudden spike in economic activity. Conversely, there is little to suggest the entire US economy is standing on the precipice like it was in 2008.
No, that isn’t the norm for the economic cycle, which is usually somewhat predictable: expansion, peak, contraction, and trough. Just where are we? Did we somehow go from peak to trough, sidestepping contraction along the way? If so, does that mean we stay in a protracted state of trough? Or is this sideways economic performance the “new normal” for the contraction phase? Is it necessary to redefine some terms after the last three years, the most bizarre ones in my life?
That, my friends, is a very good question. I am hesitant to declare “this time is different than last time,” because it never really is. However, this time certainly seems to be less like last time or any time prior to that. After all, we had a pandemic. We shut down the economy. We flooded the markets with oodles of cash. Basically, we behaved a little differently, so wouldn’t the ultimate outcomes be a little different as well.
I submit they will be. As a result, expect more of the same over the next several quarters. However, it will no longer seem as strange as it did. After all, we will have gotten used to it, and my hair is already white.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
Chief Economist & Gray Head
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.