Every year during the holidays, I try my best to limit gorging on all the goodies that appear. Pistachios, peanuts, every type of cookie imaginable and pecans served up in a dozen different ways. It is all so good, filling and fattening. Trust me, it takes no small amount of willpower on my part.
This year, I would give myself a pretty solid B for my effort. I haven’t been perfect, but there are still plenty of cookies, peppermint bark and salted nuts in the tins outside my office. In fact, but for the potluck breakfast we had in the office yesterday, I might even qualify for an A. Let’s just say I have a weakness for Conecuh sausage and breakfast casseroles, and leave it at that.
It seems you can have too much of a good thing.
Yesterday, the Bureau of Economic Analysis (BEA) announced the U.S. economy grew at a 3.2% annual rate during the 3rd quarter. This was higher than its two previous estimates, and higher than what Wall Street was expecting. So, isn’t that a good thing? The economy growing faster than anyone thought? This, when everyone is fretting over a recession? One would think.
Given the rest of 2022, perhaps it shouldn’t be too surprising the markets absolutely hated the news and tanked. To be sure, Leading Indicators were worse than expected, as was the Kansas City Fed report. However, everyone was focused on the GDP headline, shocked even. 3.2%? How now, Brown Cow?
When you have been in this line of work for over three decades, you can make an economic report say pretty much what you want. I could take a glass is half-full approach, and point out consumer expenditures were pretty strong. Shoot, what we spent on services surged some 3.7%. Government expenditures (purchases) were also up 3.7%, with particular strength in national defense.
On the flipside, residential real estate absolutely collapsed, 27.1%. For its part, commercial real estate was also in the ditch at (3.6%). Further, what we spent on all goods slumped (0.4%), which was the 3rd consecutive quarter of contraction.
Then there is the fact an estimated $161.8 billion improvement in our trade deficit added some 2.86% to the overall 3.20% number. Essentially, but for how we account for our trade balance, the U.S. economy really didn’t grow all that much last quarter. Shoot, the combined C (consumer) and I (private fixed investment) components of the equation, basically the private sector, fell $14 billion.
Fun with numbers, huh?
However, very few people go to the trouble of breaking down reports like this any longer. The headline is good enough for them to go marching off to battle. You can blame the media for this, because pundits have to get something “out” in a hurry. It takes time to do the analysis correctly, and time is money in the media industry.
So regardless of whether the gaudy 3.2% number is a little illusory, it is what it is. Unfortunately, with that rate of suspected growth, the Fed presumably has a lot of latitude to keep raising the overnight lending target. Essentially, the economy is strong enough to withstand some more pain in order to get the inflation bugaboo under control. Or so the thought process goes.
This is concerning, because a lot of the recent economic data has been, shall we say, not good. If you read last week’s depressing newsletter, you know I have extremely modest expectations for the economy for the first part of 2023. It looks to be a rocky start to the new year.
To be sure, things don’t appear poised to collapse like they did in 2020 or 2008. However, tighter money HAS caused a lot of the economy to cool off in a hurry. The money supply HAS shrunk since the start of the year through the end of October, by over $200 billion. Leading Indicators, always a good gauge, have been negative every month but one this calendar year. Finally, real estate investment has essentially come to a halt.
That GDP headline number, which is a reflection of the economy three months ago, is arguably masking the true health of things. You can scratch the word arguably. Basically, it scared investors who believe the Federal Reserve is so blinded in its theory that it can’t see the reality of the situation. This economic reality is comfortably less than 3.2%.
Norris, getting depressed around the holidays, are you? But what does this have to do with all the snacks you said you haven’t been eating? Which is hard to believe, by the way.
Fair enough. Bringing it home, yesterday’s GDP report was a lot like a lot of the stuff we cram into our faces during December. The sweet, the salty, the sweet & salty, and whatever is in the cookie tin. While it might taste delicious, it isn’t very nutritious, is it? We eat it even though we know it will pack on the pounds. In fact, many people diet ahead of the holidays in anticipation of gaining weight. Then they join a gym in January for a couple of months to work it off.
It is kind of crazy when you think about it.
So consider the number a tin of Royal Dansk butter cookies and the Fed as a trainer at the gym you are going to join. They see it in your hands, and have every intention of making you pay for it in spin glass. The only problem is the tin isn’t anywhere close to being full, but they won’t know if they don’t look.
In that way, you can have too much of a good thing even when you don’t.
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 and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
Chief Economist & Worry Wart
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, 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.