The Landmine in the GDP Report

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There is a landmine buried in today’s 2Q GDP report, and Congress is about to step on it while engaging in its debt-ceiling pissing match.

The number for 2Q is bad, 1.3%. 1Q got revised down to .4% (ouch!) from the initial estimate of 1.9%.  And we can already see that the 2Q downward revision will be of similar magnitude.

Inventories have been rising for 18 month straight while sales have recently been so-so. Soon, companies will worry about being overstocked. When that worry gets translated into corporate action—that is, inventory reduction—it will nudge us into our next recession. I expect this to happen in the second half of this year. And I don’t buy for one minute these rosy forecasts (hype is a better word) of around 3.2% growth in 2H. Where is that sudden growth supposed to come from? Deus ex machina?

And now, Congress is about to step on the landmine buried in the GDP report: Federal Government spending, which adds directly to GDP. It grew by 2.2% in 2Q, and defense spending jumped by a whopping 7.3%. Clearly, the only fundamental thing that is growing in this economy of ours is USG spending, and despite the debt-ceiling nonsense that has been dogging us for much of 2Q, it has shown no signs of slowing down. Why? Because when it comes to reducing spending, Congress is all words and no action.

But should the impossible happen, and should Congress actually and significantly cut USG spending effective the second half of this year, and onward, we’re guaranteed a recession. Just take that calculator below and punch in the numbers. (BTW, it still works, at the age of 27. I just have to change the batteries every decade or so.)

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