GDP Sunk by Plunge in Private Investment, Drop in Government Spending. Consumer Spending Rose Despite Raging Inflation

What Powell had indicated: Consumers hung in there, amid strong labor market, surging wages. But private investment plunged, incl -14% in residential.

By Wolf Richter for WOLF STREET.

Consumers once again outspent this raging inflation, and the trade deficit was less of a fiasco than in Q1. What dragged GDP into the negative, adjusted for inflation, were the drop in private investments, including a plunge in residential fixed investments, and the third drop in a row of government consumption and investment at the federal, state, and local levels.

Overall, “real” GDP – adjusted for inflation and seasonality – fell by an annualized rate of 0.9% in Q2 from Q1, according to the Bureau of Economic Analysis today, the second quarterly decline in a row, after the 1.6% annualized decline in Q1, following the super-heated growth in Q4 of 6.9%:

Powell, yesterday at the FOMC press conference, was asked several times about the possibility of a negative GDP print today, and how it might change monetary policy. He brushed the issue off each time, in different ways, by saying among other things that the labor market was still very strong, and other portions of the economy were also holding up, though weakness had crept into some other portions, and a negative print today wouldn’t change anything. And Powell’s brushing off a negative GDP print was part of why this press conference was the most hawkish I’d ever seen.

Today we got some of the complexity – confirming what Powell had indicated: Consumer spending is hanging in there, outdoing this raging inflation, in part due to the strong labor market and sharply rising wages. What caused GDP to drop was private investment, including the plunge in residential investment, and a sustained pull-back by federal, state, and local governments.

Not adjusted for inflation: Nominal GDP. Measured in “current” dollars, “nominal” GDP jumped by an annual rate of 7.8% to $24.8 trillion. This shows how inflation is eating everyone’s lunch:

Consumer spending grew, adjusted for inflation, by an annual rate of 1.0% in Q2, after the 1.8% growth in Q1. This was below the normal growth range that prevailed between the Great Recession and the pandemic, and shows that consumers struggled to outspend this raging inflation but still managed to do it.

Consumer spending as a percent of total GDP, at 70.7%, was higher than normal (68-69%) as other factors in GDP, particularly private investment and government spending weakened further and ended up with a smaller than normal share.

Government consumption and investment fell, adjusted for inflation, by 1.9% (annualized) in Q2, after the 2.9% drop in Q1, and the 2.6% drop in Q4.

Federal government: -3.2%, driven by a plunge in nondefense spending. Fifth quarter in a row of declines, after the binge in 2020 and early 2021:

  • National defense: +2.5% after six quarters of declines, incl. -9.9% in Q4.
  • Nondefense: -10.5% in Q1, fifth month in a row of declines.

State and local government: -1.2%, third quarterly decline in a row.

Government consumption and investment does not include salaries paid to government employees, transfer payments to consumers (stimulus payments, unemployment payments, Social Security payments, etc.), and other direct payments to consumers. Those payments enter GDP when consumers and businesses spend or invest this money.

The chart shows the annual rate of spending per quarter, expressed in 2012 dollars that are used to adjust for inflation. On this basis, inflation-adjusted government consumption and investment is back where it had been in Q4 2019 and in 2010:

Gross private domestic investment plunged by 13.5% (adjusted for inflation, annualized), after the large increases in the three prior quarters, including +36.7% spike in Q4:

  • Nonresidential fixed investments: -0.1%, composed of:
    • Structures: -11.7%, fifth quarterly decline in a row.
    • Equipment: -2.7%, after two quarters of gains.
    • Intellectual property products (software, etc.): +9.2%, eighth quarterly big increase in a row.
  • Residential fixed investment: -14.0%, after two quarterly gains.

Private inventories rose by 2.9%, adjusted for inflation. That’s a good thing, after the shortages during the pandemic. Inventories remain below trend, with shortages in some segments, and they will continue to rise back toward pre-pandemic trend (green line) as these industries get their supply chains untangled.

This was the third quarterly increase in a row, but smaller than the 7.1% and 6.8% jumps in the prior two quarters:

The Trade Deficit in goods & services was less terrible than the freak show in Q1, unwinding $70 billion of the $192 billion plunge in Q2 in 2012 dollars, annualized.

Exports add to GDP, imports subtract from GDP. And “Net Exports” (exports minus imports) have been a negative factor in the GDP calculations for decades, as exports rose some, while imports worsened year after year amid rampant globalization by Corporate America. In addition, overseas vendors now sell directly to US consumers via internet platforms.

During the pandemic’s most overstimulated economy ever, Americans binged on buying goods, many of them imported, and the trade deficit blew out. Consumers are now shifting their spending from goods back to services, and the import fiasco got a little less terrible:

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  225 comments for “GDP Sunk by Plunge in Private Investment, Drop in Government Spending. Consumer Spending Rose Despite Raging Inflation

  1. rodolfo says:

    “the third drop in a row of government consumption and investment at the federal, state, and local levels”

    one good sign assuming it keeps up. Less government spending
    good report wolf as usual

    • 2banana says:

      Please note and remember about 70% of government spending is “entitlements.”

      “Government consumption and investment does not include salaries paid to government employees, transfer payments to consumers (stimulus payments, unemployment payments, Social Security payments, etc.), and other direct payments to consumers. Those payments enter GDP when consumers and businesses spend or invest this money.”

      • unamused says:

        This

        ‘Please note and remember about 70% of government spending is “entitlements.”’

        Contradicts this:

        “Government consumption and investment does not include salaries paid to government employees, transfer payments to consumers (stimulus payments, unemployment payments, Social Security payments, etc.), and other direct payments to consumers. Those payments enter GDP when consumers and businesses spend or invest this money.”

        Care to try to resolve your self-contradiction?

        • BigPoppaHjalmir says:

          It’s calculated that way so it doesn’t get counted twice.

          There’s no contradiction, you just aren’t very smart.

        • unamused says:

          “There’s no contradiction, you just aren’t very smart.”

          Translation: “What’s the difference between a duck?”

        • Wes says:

          Confused me for a minute too. By spending, he means total government outlays, including entitlements, consumption and investment – of which entitlements are 70%, i.e., don’t get too excited about fiscal responsibility in the smaller wedge if there is abuse in entitlements, which is the bigger slice.

    • NBay says:

      Yeah, you need a savior no doubt about it.

  2. 2banana says:

    GDP is the sum of consumption (C), investment (I), government Expenditures (G) and net exports (X – M).

    GDP = C + I + G + (X – M)

    Now, see how much you trust modern GDP numbers when governments can print trillions of dollars of QE and, literally, give it away to everybody.

    • Butters says:

      You can’t. GDP is absolutely meaningless to most people, but it’s important to politicians/policymakers because it can be used as a cover for their recklessness.

      • andy says:

        Politicians are fixing to borrow and spend another half a Trillion dollars to fight inflation and to pay down debt. They think we are idiots. We have politicians we deserve.

        • Butters says:

          And they are calling it, “Reduce Inflation Act.”

          Man I feel like I am going insane these days….

        • jon says:

          Most of the people who vote have no idea what’s happening in Washington and in a way they are indeed idiot. Their votes count as anyone else. Politicians from both the sides do rely on these mis/un-informed voters.

        • George Carlin says:

          The money will be used to build giant ovens to incinerate the $10 trillies from the last binge. Another worthy endeavor from our noble leaders and lords!

        • NBay says:

          We ARE uneducated idiots, and we WILL soon vote in another Savior just to PROVE IT! This one will likely stay….a long time…..long enough to see nasty government shrink to nothing. The only grey areas left, will be that all Saviors work in mysterious ways….so, in a well understood way, all will become clear.
          And I will be quite dead, (even if I have to speed it up a bit)

          thankfully.

        • The Real Tony says:

          Oil up strong the last two days few seem to be betting inflation will fall.

        • historicus says:

          ” We have politicians we deserve.”

          I don’t remember doing something that deserves this punishment

        • NBay says:

          Hist,
          Look around at all the shit (I mean assets you have, and how you still want more).
          That help you remember anything?

      • sunny129 says:

        Butters

        ‘GDP is absolutely meaningless to most people;

        Important to top 10% who have over 90% of Wall St wealth and the bottom 90% less than 7%. No wonder it is NOT important to them. But the recession and on going inflation affects more to those in the bottom.

      • Cashboy says:

        If I take legal action against somebody and pay a lawyer; is that an increase in GDP?
        If the person appoints a lawyer to defend my claim against him; is that an increase in GDP?
        If I cannot afford to pay a lawyer or know that there is no point in taking legal action because the defendent would have no funds to pay me if I won; then there is no increase in GDP as no lawyers appointed?

        So why is an increase in GDP so important to economists?

        • Miller says:

          Yeah our econ professor had some harsh words about the flaws of GDP as a measurement, in one of his first lectures he gave a history lesson on how even the guy who invented GDP warned it was a very limited measure and said little about societal good. Increased by societally damaging and inefficient things as much as actual production of desirable goods and services. It wouldn’t matter if politicians and the media kept a better perspective, but too many dumbly structure their policies to “add to GDP” even if GDP goes up for all the wrong reasons, and actually makes more people miserable than doing anything beneficial. RFK even had a famous quote about it.

          Like you say, frivolous lawsuits and legal action add to GDP even if they make a lot of people miserable because money is exchanged for a (expensive) service. Some of my good friends have had horrible divorces, especially doctors with their long hours–an old surgeon friend lost his home, car and custody of his kids, and has to pay lifetime alimony that got imputed at an outrageous level, and if he ex. gets sick and can’t make one of the payments, he even risks prison. (Florida has ridiculous family law–he’s even thinking about moving out to somewhere like southern Brazil or France, he basically has a life sentence already, all because his wife got lonely with his long hours saving people’s lives.) It was an awful divorce and made everyone and the kids miserable, but it meant a lot of money spent in divorce courts and made some attorneys rich, so added to GDP. Same with medical bills that bankrupt Americans or huge college tuition and student loans. The dumbest thing is that for ex. in countries like Australia, UK or the EU where they much less costly healthcare than the US (and debt-free college tuition and mediation for divorce in most of Europe–no big “financial opportunities” for divorce lawyers there), GDP actually penalizes them for their efficiency, since less money is spent on socially damaging things that make people miserable. In fact for all the USA spends and increases GDP with healthcare, we have the worst life expectancy of any developed country. (United States life expectancy even dropped below China and Cuba recently.) What’s the use of increasing GDP if life expectancy goes down and the American population is the sickest in the developed world?

        • Anthony says:

          Miller

          In England the college fee, for a degree, is £9,500/$11,400 a year, with accomodation costs on top of that……..

        • Ron says:

          If you build a McMansion it adds to the GDP, if you fill it up with furniture it adds to the GDP. Is the decline in building investment a bad thing? Needs further measurement as to which building investment is declining.

          Aside from that my favorite GDP multipliers are the military industrial complex, the junk food-healthcare complex, and the guns-security complex. Sometimes I really wonder what an efficient economy would look like. Perhaps it’s a case of grass being greener, but I have a feeling that it would be more like northern Europe.

      • Spencer Bradley Hall says:

        Ever heard of N-gDp targeting?

    • unamused says:

      “governments can print trillions of dollars of QE”

      The US government does not print trillions of dollars of QE. Bankers control that, not the government.

      Why are you jacking up the disinformation when you’ve already enslaved your enemy in the Class War?

      • jon says:

        You are right but I think you are missing the forest for the trees.
        Govt can take on trillions on load by selling treasuries to FED and FED in a way is an arm of Govt. People may not believe it but FED exists to fund Govt debts.

        • unamused says:

          “You are right”

          I am right. And your attempt to confuse the issue with irrelevant arguments doesn’t make me wrong.

          “People may not believe it but FED exists to fund Govt debts.”

          No, The Fed exists to feed the bank cartels. The US Federal Reserve was founded decades before the US government got trillions in debt, and it got trillions in debt because it no longer taxes the rich. The evidence is incontrovertable: deficits skyrocket when you cut taxes on the rich.

          You’re attempting to use the government as a scapegoat for the sins of the Financial Industrial Complex, which can coerce and corrupt officials elected by the people any way they please.

          It’s disinformation, and we get a lot of that here.

        • Butters says:

          “No, The Fed exists to feed the bank cartels.”

          I think you are wrong on this. Yes it started out as such but today it’s nothing but another government entity. Of course, banks make money in the process.

        • unamused says:

          “today it’s nothing but another government entity”

          Absurd. Both The Fed and the government make a point of emphasizing the independence of The Fed, because they don’t want you to know what the REAL power relationship is.

          Get with the program, Junior:

          “… the powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.”

          Quigley, Carroll. ‘Tragedy and Hope: A History of the World in Our Time’. New York: Macmillan, 1966. Print.

        • Sams says:

          Both Butters and unamused could be right. The FED may be nothing but another government entity. With the government itself being a financial industry entity. 😉

        • unamused says:

          “The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the government of the U.S. ever since the days of Andrew Jackson.”

          Franklin D. Roosevelt, letter to Edward House (1933)

        • Ed says:

          The Federal Reserve represents the interests of the banks.

          Protecting the banking system is it’s first job and it’s raison d’etre. It used to be that the banks had to manage market and banking crises on their own. Now the Fed has that role.

          Do other people benefit if the banking system functions? You bet. That doesn’t change the Fed’s reason for being.

        • Cas127 says:

          Una,

          How many military divisions does the Fed have?

          Because the G has plenty and isn’t shy about rolling them out when anybody runs counter to its interests.

          List all the times in the last 100 years when the “Banker’s Cartel” of the Fed (in your misappraisal of power politics) ran an interest rate/money supply policy opposed by the Treasury.

          The supposed separation has been rendered a farce – the Fed now exists mainly to paper over the habital policy failures of DC.

        • historicus says:

          The Fed operating for the banks
          or the Fed operating for the government are not mutually exclusive conditions. Both “profit” from the arrangement.
          The Fed indeed is the great enabler, since 2008, by keeping rates artificially low, reducing the cost of debt creation to unrealistic levels for the govt.
          And I think it was Wolf in another thread that pointed out the compensations and salaries for Fed people mostly come from the federal government.

        • QQQBall says:

          @Butters – he is absolutely correct. All the bailouts flow through to banks. Banks make bad loans and “borrowers” get bailed out? Give me a break.

    • Augustus Frost says:

      GDP only measures the monetary value of estimated economic activity. This data point says little about how much better or worse off a society is, most of the time.

      Like the other post above mine said, it’s PR. You get what you measure.

      A society can be going to hell in a handbasket, but it’s all supposed to be great if there is “growth”.

      • Miller says:

        Totally true, on all points. Our econ prof made similar points in our first lectures and I couldn’t of said it better. GDP says nothing about whether the goods and services exchanged are actually making society better, in fact GDP can and does often rise for all the wrong reasons. Like one of our speakers pointed out a few months ago, the US has by far the highest healthcare GDP spending in the world but the very worst life expectancy of any developed country. (Again with USA life expectancy dropping below even China and Cuba recently.) From that yard-stick, it would seem that all that healthcare GDP is perversely working against the health of Americans. And the health of a population is the most basic measure of its well-being and indirectly, its actual economy. What’s even the point of a measurement like GDP in such cases, when “what’s good for GDP” is so clearly in the opposite direction of what’s good for the health of a society in the most plainly obvious sense?

    • kam says:

      Or, since Government requires reduction of GDP in the private sector, by way of taxes, and those taxes don’t yield but a small percentage of value of what it would yield, if left in the hands of the private sector, then why is “Government” not discounted by a factor of say 60% if they want to include it in Gross Domestic Product ?

  3. andy says:

    Wolf,
    Your Fed trade worked just like you described. If one could stick closely with the timing, and exit in time, one could get 10-12% return (over 2 day period) using SP500 3x ETFs (my back of the napkin calc).

    • Wolf Richter says:

      andy,

      It would have been a hoot to have this thing confirmed for a third time all the way through. The first leg worked like a charm. But the second leg of that trade collapsed at 10:30 a.m. today. Which means that, after taking out the short at the end of the presser, you’d have to cover today at 10:30 a.m. That’s not nearly as much fun as I had envisioned ;-]

      • andy says:

        Not an easy trade to pull off, requires real-time monitoring. But nice return in short time. If I was in it and did not exit this morning, I would have hold on till after Apple reports.

      • JeffD says:

        A few more days of this, and the Fed may be forced into a 0.25% intermeeting rate hike to make it clear they are committed to fighting inflation. This huge multiday increase in the stock market shows just how far the Fed’s credibility has fallen.

        • phleep says:

          I am very curious whose money is going into stocks today. The low-level retail folks took some losses since November, and now supposedly their lunch is being eaten partly by inflation, plus their persistent consumer spending. Yet somebody is putting real dollars into an assumption (I surmise) that this is the bottom, or at least the beginning of a rally. No? And, who?
          I mean, short covering isn’t THAT much, is it?

        • Wolf Richter says:

          JeffD,

          Yes, you can see that in some of the comments here. The Fed totally shot its credibility to little bitty pieces. At this pace, it’s going to take a lot more rate hikes than anticipated to get markets to transmit the Fed’s monetary policies to the economy. That’s a big problem.

        • Depth Charge says:

          Exactly. Nobody is taking the FED seriously at all. Many, many people were prepared for 100 basis points, and the FED uncorked another yawner, signaling that inflation is not an emergency. With a fed funds rate almost 7% behind CPI, people are still pouring into risk assets and real assets, because their money is getting incinerated otherwise. Jay “Yellow Belly” Powell strikes again.

        • andy says:

          phleep,
          it is bears money going in. Those that got grreedy and did not cover before the next bear market rally. Nothing new under the sun. The time to go short again is tomorrow, maybe early next week if it keeps going higher. It may go like champagne bottle if bears panic.

      • Massbytes says:

        wolf,

        Maybe it had something to do with Manchin now agreeing to support a slimmed down Build Back Better bill. Meaning Congress is getting ready to throw more money into the fire. Usually the stock market loves that. Do they not?

  4. Not Sure says:

    Wolfstreet headline from May 15th: “Q1 GDP Drop Was a Freak Event that’ll Get Unwound in Q2”

    Many WS headlines have aged well, but this one unfortunately did not. And if other large drivers of GDP continue to slow down (housing, investment, etc.), Q3 will be no different. The key is going to be jobs. If we are only in a bizarre technical recession where the job market maintains its record strength totally against all logic, then the Fed will have a reason to keep tightening. But how is the job market going to stay hot for long when so many other factors point to a weak foundation supporting those jobs? This is precisely why market participants are calling the Fed’s bluff. Monetary policy is the only thing markets seem to care about anymore, so bad news for the economy is good news for stocks. Unemployment lagged the pop of tech bubble #1, and the GFC bubble was showing serious signs of weakness well before unemployment started growing. If we are entering a proper recession in which unemployment starts to grow again, CPI will come down to meet the climbing fed funds rate, and the Fed will pull a U-turn. That certainly seems to be what the bond market is saying with yields continuing to fall in the face of a rate hike. Time will tell how accurate the bond market is this time around… But it has a decent track record outside of QE periods.

    • SoCalBeachDude says:

      All that falling yields (interest raters) on bonds tells us is HOW DELUSIONALLY STUPID bond speculators are in Summer 2022.

      • DawnsEarlyLight says:

        The short term treasuries seem to be doing well. Who cares about the 10yr? Realtors and Insurance companies? Just more manipulation disinformation.

        • JeffD says:

          Yeah. The yield is only -6% on the short end, inflation adjusted.

        • DawnsEarlyLight says:

          JeffD, lol, that is true. Not much of an option, but a slightly higher rate and shorter duration might be a lesser bad option.

    • Einhal says:

      Well said. The real test will be whether inflation stays high. To the extent that it’s being driven by the wealthy, asset class, higher unemployment won’t necessarily bring it under control, meaning stagflation. Which means that the Fed won’t be able to do the u-turn.

    • Wolf Richter says:

      Not Sure,

      “‘Q1 GDP Drop Was a Freak Event that’ll Get Unwound in Q2’ – Many WS headlines have aged well, but this one unfortunately did not.”

      RTGDFA not just the headline of the article you referred to before before posting.

      From that article that you reference:

      “The Freak event that caused GDP to drop in Q1: The Trade Deficit in goods & services exploded by $192 billion in Q1, annualized and adjusted for inflation, the second-worst ever drop in dollar terms, behind only Q3 2020.”

      And yes, $70 billion of that $192 billion trade deficit was unwound in Q2. Look at the bounce in the bottom chart.

    • Sams says:

      As inflation may and may couple with CPI and the strength of this coupling shift with time, employment may or may not couple with CPI. The method to assemble the CPI do play a large role in this too.

      The input to CPI is the price of goods and services consumers purchases. Weighting on the different items depend on what percentage of income the consumers use on this item. It is then entirely possible to have prices rising on the CPI basket of goods and services even if employment is down.

      Poor people will continue to spend on ever more expensive food, those well off will continue to spend on ever more expensive cars and holiday trips. When poor people do not have any more money, they will not spend on food either, starve and no longer be consumers in the CPI sense as they spend no money.

      • COWG says:

        “ When poor people do not have any more money, they will not spend on food either, starve and no longer be consumers in the CPI sense as they spend no money.”

        As the checkout clerk at Walmart says, “ This would be a pretty good job if it weren’t for all the people”…

        • Thunder says:

          Venkarel ..Leave Sri Lanka out of this, it was years of corruption, failure in justice, law and order and a President that had employed family .
          OH Wait !
          Oh Dear !
          Say it is not a virus of the above because all you noted will come to pass

      • Venkarel says:

        I think the response of a multitude of starving people when wealth is all around them is not just to meh and die. I think more fires, guns, screaming , looting, death , destruction, misery, etc. is the more common and rightfully feared response.

    • Thunder says:

      Here is another that will not age well
      Bloomberg headline: US Economy Shrinks for a Second Quarter, Raising Recession Odds.
      Ministry of truth putting “no doubt” out there.

    • phleep says:

      Is the retail-level money just spending itself off a cliff? It’s a wonderfully self-sacrificial and patriotic thing to do! Good luck with that! Enjoy those overpriced mimosas!

      • Depth Charge says:

        What do you think is happening? The fed funds rate is almost 7 gotdam percent below CPI (which is as fake as a $3 bill). People are spending as fast as they can so as not to lose it to inflation. EVERYBODY is talking about inflation now.

  5. sunny129 says:

    Again the power of perception remains strong over reality. NOT a mkt for investors. Swing trading with long term bias and minimal hedges, strategy working ok, now. The BAD news has to be real WORST news. Mild recession is baked in. FOMO is in play. Faith in Fed is very high, whether true or not.

    Very difficult environment for conventional investors. I went through same frustrations more than 100 times, since ’09, betting on logic and rationality but kept losing. I learned my lesson

    Junk, High yield and high grade bonds ALL going up! At least for now.

    Now TRADING over investing is winning for those nimble traders. This could change in 6-12 months!?
    TO EACH HIS/HER OWN

    • SoCalBeachDude says:

      You mean the power of DELUSIONS AND LIES? Indeed, that is what infest the entire US these days.

      • sunny129 says:

        SoCalBeachDude

        You can interpret whatever you wish.
        But the power of perception is winning and the reality losing.

        Mr. Powell yesterday the Fed is close to ‘neutral’ rate!? Does he really mean it or not?
        See my comment, all the way, below.

        I go along the mkt perception but sell my 90% of longs (mostly leveraged ETFs on indexes) at the of day, just like I did it yesterday.
        My one portfolio (rapid swing trading) was decidedly negative all last week but now flat to positive. (in my IRA acct)

    • Nate says:

      It’s always a market of perception. I am probably butchering the concept but EMT claims that all the historical information gets priced in, with volatility explained as collective predictions meeting reality.

      While I am not really an EMT guy because it fails to explain all the weird manias and crashes, it is a useful concept in properly evaluation historical data. It makes pattern spotting a particularly treacherous game, as any patterns are wiped out by people trading on that information as well. And charting is pure voodoo.

      In short, at the bottom of the bear markets, there were always folks perceiving stocks would continue to go down. Just as there are always folks at the top of the bulls saying it will go up, up, up!!

      Investors pay attention to fundamentals. That can at least identify when some markets probably have went really irrational and encourage you to diversify out to more rational opportunities. But as a guy once pointed out, the market can stay irrational longer than you can stay solvent. Rational plays are painful in irrational markets, and there is always the chance that you are the irrational one.

      • sunny129 says:

        EMT is WRONG after ’09. It works only when price discovery is allowed, like before 2008.

        ‘Investors pay attention to fundamentals’

        Yeh. Right. Been in the mkt since ’82. Played by the rules until Fed interfered with ZRP and Trillions showered to boost the assets. I have lost big time by ‘paying to fundamentals”!
        The usual business cycles are replaced by insane credit cycles. Does EMT recognize this? NO.

        Just diversification won’t help in Bear mkts. One needs UNCORRELATED assets including those go against the mkts, of course with hedges.

        Fed made the mkts as CASINOS. Fundamentals won’t work. Nimble trading ( with hedges) along with ‘perception’ vs reality is the game now unless a worst news of any kind or bankruptcy of a major institution.

        • Augustus Frost says:

          Efficient Market Hypothesis is BS, all the time.

          Information or the supposed fundamentals do not explain prices.

        • JeffD says:

          A market is not a casino when you shovel winnings from the table every single time. And the Fed wonders why there is an employment crisis. Ha! The most competent people drop out of the work force to play the no lose game, leaving the remaining plebians to go to work every day and do the best they can.

      • HowNow says:

        Terrific summary of the EMT beast. Keynes would approve.

        • sunny129 says:

          EMT is a myth perpetuated when ever irrationality wins over rationality. Fundamentals went out the window by Fed in the March of ’09.
          We are in the CASINO game, managed/massaged by Fed.

      • HowNow says:

        EMT: “…but EMT claims that all the historical information gets priced in, with volatility explained as collective predictions meeting reality”.
        Nate, this means that EMT is reliable when there is NO volatility. Higher volatility = “weird manias and crashes”; low volatility = minimal mania. NO volatility is when EMT represents an accurate valuation of the market, in other words, NEVER. EMT is right up there with the “rational-economic man”. Is there a doctoral thesis in there somewhere?

    • Cashboy says:

      for the last year, I do not look at any investment for a return.
      I only look at preservation of capital.
      I decided holding 50:50 Swiss Francs and physical gold was the safest bet.
      Holding Swiss Francs in a bank account is even risky now.
      The cash is falling in real terms with inflation.

      But what is the alternative?

      • Harrold says:

        Bitcoin.

      • Anthony A. says:

        You could buy short term treasuries. Too late to buy houses.

        Maybe go to the track and bet on some horses or go to Vegas and do some sports betting.

    • JeffD says:

      The market rocketing higher indicates a collapse of Fed credibility, not faith in the Fed.

      The Fed has indicated its commitment to moving towards a 2% inflation target, and is being summarily ignored.

  6. Minutes says:

    Biden told me this isn’t a recession.

    • Wolf Richter says:

      It’s not ZH or Biden or you or me that determines when the economy is in a recession. This is determined in the US by the NBER (National Bureau of Economic Research). This is their definition:

      “A recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

      The NBER includes lots of factors, not just GDP, but also labor market metrics, etc.

      With consumer spending still growing, and with the current labor market, it’s hard to believe that the NBER will call this a “recession.”

      That has been the case for decades. ZH is out there with braindead BS on this, claiming that the government and Fed are changing the definition of a recession. ZH claims that it should be “two quarters of negative GDP,” and that the definition that has been used for decades is somehow a change.

      • Minutes says:

        Nominally maybe not. In real terms for most people it doesnt feel good.

      • Cashboy says:

        A recession is a period of economic decline, signaled by an increase in unemployment, a drop in the stock market, and a dip in the housing market. An official recession is not declared until the total value of goods and services in the U.S. (called the Gross Domestic Product or GDP) has been in decline for two or more quarters (six months or more).

        Looking at that definition; before you can even decide if there is a recession there has to be two successive quarters of negative GDP.
        Supposedly high employment and unemployment going down so no recession.

        • JeffD says:

          They have *always* factored in employment when calling recessions. When there are almost two job openings for every unemployed person, that is not a recession.

        • phleep says:

          We have apparently disloyal workers job-jumping, and in the financial markets, a lack of price discovery. The whole thing (and the resulting statistics) feel like smoke. The macro-economy is hot and chilling?

          Fed hikes rates, and markets zoom, with no substantive change since they were falling sharply? Bitcoin is back?

      • Trich says:

        I loathe this administration as much as the next guy, but I don’t entirely disagree with the notion that we’re not yet in a recession. They haven’t helped themselves with their laughable “Putin price hike” nonsense. But the labor market and consumer spending don’t really scream recession just yet. I agree with Summers that Q1 2022 was basically coming off the inventory binge from Q4 2021.

        That said, the [much needed] decline in residential real estate, along with ever fewer people doing cash out refis played a big role in Q2 2022 being negative, a trend that is likely going to continue in Q3.

      • Kilye says:

        A few years of negative GDP would be great – more destruction of goods and services than creation. Alas, it never happens in peacetime.

  7. Jackson Y says:

    Looks like today’s market broke the pattern of the last 3 FOMC meetings: the S&P 500 is up another 1%.

    The stock & bond markets seem very, very confident a policy pivot towards slower tightening is imminent. Since last month’s inflation numbers were yet another fresh cycle high, this policy pivot can only happen in one of 2 scenarios:

    1) Inflation successfully gets back down to 2% PCE (which Powell recommitted to yesterday) without much additional tightening from here. Soft landing achieved; happy days are here again.

    2) The Federal Reserve abandons its 2% PCE inflation target, at least unofficially. They pivot before it’s certain that inflation has peaked, or is on a sustainable path to 2%.

    The bond market is likely betting on the second scenario, especially with the current FOMC’s left-wing tilt after all those Biden appointees took office.

    • Einhal says:

      They’re delusional. As I wrote below, Apple and Amazon’s “strong earnings” means that inflation is not anywhere near on the way down, much less back to 2%.

      Right now they’re construing bad news as good news (because it’s the end of tightening, supposedly) but good news is also good news.

      You can’t have it both ways. If companies are still doing well, that means inflation has not peaked, and much more tightening will be needed.

  8. greg says:

    8 to 10% inflation and FFR @2.25!
    Hawkish!! Too funny!!!

    • sunny129 says:

      greg

      The key mark is 2.75% and above to watch the mkt reaction. That was the level in 2018, Mr. Powell pivoted suddenly to sooth the Mkt tantrum along with 4 Trillions, claiming it NOT really QE! Go Figure.
      No wonder Mkt is NOT believing and keep zooming!

      Volatility is traders’ heaven only to those nimble and experienced traders. Definitely NOT for the novice.
      Long time investors are fodder for Algoes and high frequency traders, unless they have hedges.

  9. greg says:

    Banana-republic Jerome has inflation in his sights except he sees as well as Mr. Magoo!

  10. Ben says:

    For sure on conventional investments. Most reckless fed ever and the death of savings.
    Hopefully the fed will come to their senses and not reverse course. Ten year drops again with the drop in the GDP.
    That’s the norm expecting the Fed again to bail out the reckless spending. Fed needs to stay the course and get inflation under control.

  11. Einhal says:

    The markets are basically taunting Powell. They’re saying they have no confidence that he’ll make any hard decisions. If he digs his heels in rather than caving, the markets will be hitting limit down days at some ponit.

    • sunny129 says:

      Einhal

      “They’re saying they have no confidence that he’ll make any hard decisions.”

      They have based on the past events by this ultra dovish, most wreck less Fed’s actions disconnected with their words! Who would blame them? It is their ‘power of perception’ which goosing the mkt. Trade along or fight it is the choice investors are facing.

      Mkt won’t react unless there is not just bad, but WORST news. Inflation numbers in August and September will direct which way mkt goes! I think inflation will be stickier than most assume. Wait N See

      • Einhal says:

        Worst economics news won’t do it, because that’ll have them convinced he’ll just start printing again.

        The worst news for this market is that the Fed will not reverse course.

        • sunny129 says:

          For that Fed has to go beyond 4% and probably 5% to contain inflation below 3%. Has Mr Powell has the guts to do it, like Mr. Volcker? More likely he will follow similar Mr. Burns (before Volcker)

          Wait N See

        • Jackson Y says:

          It’s Wall Street alternating between hope & cope.

          When the Federal Reserve started tightening, the Wall St “consensus” was they would achieve a soft landing & bring down inflation without too much collateral damage.

          Now Wall St seems to be hoping for a hard landing. Why? Because a soft landing means rates could stay relatively high for the foreseeable future, while a hard landing – especially one that simultaneously wipes out inflation – could open the door to more ZIRP & QE, which is what Wall St is hopelessly hooked on like a crack addict.

    • Nate says:

      That’s how I interpet it. I don’t think that’s entirely crazy because Powell has been all over the place. Maybe this time is different and Powell finally grew a pair. But a lot of the market thinks he will cut and run lest he gets scolded by Congress for causing a recession.

      It’s hilarious that Warren and Wall Street bulls are on the same side. Politics and bedfellows.

      Regardless, inflation has been driving fed policy and will continue to drive fed policy. If it remains around these levels, Fed will raise. Powell is a weathervane and inflation is the wind.

      • Jackson Y says:

        Sadly the bond market is probably right. Besides Powell’s prior history of being spineless, Biden has made his mark on the FOMC with multiple appointments.

        Powell’s next Humphrey-Hawkins testimony and Q&A isn’t till the next Congress anyway. As long as inflation remains elevated, I expect Republicans will focus on that. The question is whether or not Republicans can actually retake Congress, now that what would have been a clean referendum on the economy has been disrupted by debates over abortion & other social issues.

        Progressives formed an unholy alliance with Wall Street on low rates, and that’s been the case for over a decade now. Progressives need the low borrowing costs for the extravagant social spending they want to enact, and Wall Street needs them to juice asset valuations. All signs point to this unholy alliance continuing for the foreseeable future.

      • HowNow says:

        Another astute point, Nate: “Powell is a weathervane and inflation is the wind.” But that’s what the FED is supposed to do. Not go with the flow, but adjust to the direction of the wind. I do think it’s time to change out “the punchbowl” and replace it with “the weathervane.”

      • Butters says:

        Warren?

        What a b1tch and Berney too. They are supposed to be for the little guys…lol

    • Flea says:

      And blackrock will make a killing ,shorting market ,. Got to let your friends know first this is biggest ponzu ever . Hope Rome = U S doesn’t fall

      • Gattopardo says:

        Blackrock doesn’t trade it’s own account (it doesn’t have one). It runs client strategies that the clients choose. C’mon, man.

        I saw someone else say Blackrock lost $1.6 trillion of client money. No. Blackrock clients chose strategies that have lost $1.6 trillion. Big difference. You know all those iShares ETFs? Blackrock. A whole bunch are boring S&P, etc., and they are a giant part of that $1.6. Sheesh.

    • historicus says:

      The markets have identified Powell as a “get along” guy….not willing to do what needs to be done. How late they have been with their misidentification of the conditions.
      This is why there must be guard rails decided by formulas. If inflation had been indeed “transitory”, then the required rate hikes could have been “transitory” as well. Instead they “kept a close eye on it.”

      “Procrastination is irresponsible and likely deceit.” D Bonheffer
      Keeping “an eye on it” is indeed intentional procrastination.

      • Wolf Richter says:

        “The markets have identified Powell as a “get along” guy….not willing to do what needs to be done.”

        Hahahah, the same markets that said that the Fed can never taper QE, and then can never end QE, and then can never hike rates at all, and after the first two hikes, will cut rates by July or September, and can never ever do QT? Those markets? Those markets are delusional.

  12. gametv says:

    The real story here is the net exports number. Look at how much that deficit has grown since the pandemic. We are just a consume economy. Spending all our money on junk we buy from overseas. This is only possible with massive increases in debt.

    This consumer spending is going to plunge soon. But I will surmise that it is the high home prices that give people the illusion that they are rich. In the west home prices are still hanging at very high prices and there are a few really naive people that are buying homes that are 400K overpriced simply because they are 100K less than a couple months ago. The very definition of stupid.

    High home prices also support the state budgets with increased property tax revenues. Unfortunately, the politicians will spend the extra money and lock in new expenses and once the home prices plunge, the governments will be in a very bad position as well.

    When you think about real estate, you have to realize that the homes that were worth 40% less just eighteen months ago were also being supported by interest rates that were substantially lower, thereby creating a much lower monthly payment. So just getting back to the price of 18 months ago still puts the montly payment at a higher price. Give it another couple months and the rise in inventories and lack of demand will start to finally shift the real estate market prices.

    I think the only people buying homes right now are people who have sold a home and are cash rich and are buying in a different area. Inventories still need to build more for home prices to really start a descent.

    • unamused says:

      “Inventories still need to build more for home prices to really start a descent.”

      The US Census reports that at least ten million homes are vacant and are not vacation homes or second homes. There’s plenty of inventory. It’s just being kept off the market to limit supply and ramp up prices, and those won’t be coming down very much or very soon.

      There’s loads of money to be made in the manipulation of residential real estate markets.

      • Cashboy says:

        “There’s plenty of inventory. It’s just being kept off the market to limit supply and ramp up prices”

        Who owns those houses and surely they still have to pay taxes on that property and have costs maintaining those houses?

        • VintageVNvet says:

          Of course they pay taxes and costs cb, we all do; the significant difference is that speculators who are doing Residential Real Estate biz, corporate and otherwise can and do deduct every such thing, including periodic and random ”inspection visits” to their properties.
          That biz can be a lot of fun from what clients used to tell me when phoning in to a conference call from Palm Beach type places, SF, similar world wide these days, eh.
          We ran into bank/speculator corruption in 2015, when no bank would ”deal” with us as a cash buyer family because they could get better brownie points by making a deal with their corp buds.
          Many properties needed immediate work and were not getting it because of that collusion confusing responsibility for maintenance and repairs.

        • unamused says:

          “Of course they pay taxes”

          Of course they don’t pay taxes, which is why there’s a ballot initiative in SF to tax 40,000 vacant homes that are kept vacant to run up prices.

          Call it political theatre. Go on, say it. I dare ya.

        • COWG says:

          Depends on the timing…

          In FL, you can go several years without paying taxes before a tax certificate is sold…

          Even then it can take several years before the property can be brought up for tax sale…

          Even after a tax sale, maybe 5-6 years down the road, the owner still has the option ( last chance) to pay the arrearage and keep the property…

          It’s a common dodge for builders to avoid the taxes and then bring them current when a house/ property sells to clear the deed from the profit
          ( hopefully) from the sale…

      • gametv says:

        And it makes sense to keep a home vacant while prices rise…until the value starts to plunge. Most of those owners will assume this is a temporary downturn and wont sell now. They will wait and see home prices fall and fall and fall and fall, for the next year and then they will put it on the market, but priced too high to get a bid and watch it sit there and finally will feel enough pressure to sell at rock bottom.

        The ability to airbnb a home is also a way to generate cash, although i have to assume consumers will pull back on travel soon too.

      • Gattopardo says:

        “It’s just being kept off the market to limit supply and ramp up prices….”

        Nah. Or wait, maybe I’m just not in on the massive collusion that would take. How do I get in on that email distribution list?

    • Nate says:

      I hope you’re wrong, even though I don’t own a home. Housing crash recessions are BRUTAL because so many economic players get hit.

      I share your fears. But I gotta still hope that maybe we get tolerable inflation, WFH Forever, builder pullback, and dead housing activity to avoid nominal declines in most markets and skate past this debacle. But Japan/GR/etc. Often low interest rate asset bubbles don’t end well and that it got expressed in residential real estate is tragic.

      • Einhal says:

        So what you’re saying is, young people starting out who want to buy a home should just be SOL, and the inflated prices should be artificially maintained?

        • HowNow says:

          Even though Wolf disagrees with me on this, I think that deflation (long-term) is much more devastating than inflation (long-term). So on-going deflation of residential RE will be MUCH worse than a continuing rise of home prices, even proportionately. Clearly, both are bad, though, and I do think the FED was busy hallucinating in the run-up to 2008 and the last housing price run-up (today’s).

        • DawnsEarlyLight says:

          Cover your A$$ets, no one else will. Wait for the opportunity, it will come.

        • Nate says:

          If the choice is renting for longer or being laid off and not being able to buy a home or pay rent, yeah I would say younger people might be better off.

          I never cheer for a housing recession, it l’s like nuclear war. Everyone basically loses. Maybe you’re a prepper and will be vindicated, but you still have to muddle through a shitty time. Plus, you will likely miss the next bull, statistically speaking.

          So, hope for the best but try to prepare for the worse. My heart says we might skate. My gut says housing is fucked so we’re all fucked.

        • gametv says:

          HowNow – I think that the fears of deflation for consumers are over-rated. Businesses should fear deflation. It is not good for profits. But for consumers, deflation is great.

          Look at technology. The most productive segment of our private enterprise and it is in a constant deflationary cycle as we get better and better products for less money.

          I believe that healthcare will soon get hit with deflationary pressures from DTC healthcare entities that will drive very heavily on efficiency and reduce costs. I am waiting for the day that they bundle together an AI doc (artificial intelligence doctor for routine healthcare) and a catastrophic insurance policy for major diseases. Transportation and energy will also be hit by deflation once we have autonomous shared networks of cars that are running 24/7 on electricity.

          We need to stop hating deflation and start loving it. It is brutal on companies that refuse to innovate. So who cares if some poorly run companies go out of business and are replaced by innovators? That always improve lifestyles.

          It is an economist’s lie that deflation is bad. It all depends upon the root cause of deflation. Japan suffered from deflation due to population changes (old people) and a lack of consumption and business structures that were impossible to change. That isnt the US economy. Deflation based on increased productivity is good.

        • COWG says:

          Gametv,

          As has been postured here many times, the chance of any deflation is minuscule…

          I refer you to the historical CPI index for the last almost 50 years…

          Only in a very few month to month CPI measurement has the index decreased from the previous month…

        • HowNow says:

          gametv: increased efficiency isn’t “deflation”.

        • Einhal says:

          Yes, Nate, those who are laid off will be worse off. But even in a recession, the vast majority still have their jobs.

          But having to “rent longer,” which could be forever if home prices continue to inflate beyond younger’s people’s ability to save, affects everyone.

          I can’t believe otherwise smart people defend home price inflation as a good thing.

      • Augustus Frost says:

        Too many Americans live beyond their means buying things they can’t afford, including housing.

        There is a massive housing bubble now, the worst ever in the US. I’m assuming there will be another mortgage or foreclosure moratorium which will alleviate the problem you are worried about somewhat, one which I don’t consider a problem.

        The actual problem is the housing bubble. The housing crash is the solution to make homes affordable again, not economic fakery to create “affordability” while making so many homebuyers debt serfs.

        • Sams says:

          There is a catch. The US$ can be considered real estate backed. At least the counterpart to mortgages are the housing value. Now, that inflated RE asset bubble is then the counterpart to the equally inflated US$ bubble. What happen to the US$ bubble if the housing bubble that back it crash?

        • gametv says:

          I would love to see a cap of 15 years on mortgages at 6% interest rates. Think about that. People pay off the home in 15 years and then can retire at a decent age.

          If home prices fell for 5 years straight people would stop hoarding more than one of them, or more than they really need.

  13. lisa2020 says:

    No problems, United Arab Emirates GDP is projected to be up over 8%, that should correct any imbalance every where else, and definitely offset any drop in the US GDP.

  14. Old School says:

    Exports minus imports shows US is running through reserve currency at a fast rate I believe. Will not be able to trade negative yielding treasuries for foreign goods forever. At least the way I understand it.

    • Augustus Frost says:

      No, that’s one reason why the majority of Americans are destined to become poorer. Other countries aren’t going to trade real production for IOUs forever.

      • HowNow says:

        AF, I’d like to know what “productive” means to you. Is a root canal productive?

        • Einhal says:

          Yes, a root canal is a service, and it is productive. But Augustus is right. We consume way more than we produce. And that is only possible so long as people are willing to give us their production for printed dollars.

  15. Drowningfish says:

    Wolf you tripped up a bit on this one. You predicted that GDP for this Q was gonna be positive. As well thought the market would drop today after spiking up on fomc day. Both turned out to be false.

    • Wolf Richter says:

      Quiet. Don’t distract me. I’m busy eating crow.

      • HowNow says:

        Everyone has a crow sandwich, now and again.

        • Halibut says:

          It’s a customary last supper prior to being keelhauled by a drowning fish.

        • historicus says:

          Most speculators are wrong nearly 50% of the time…but they take the losses quick and let the good ones run……which is the key.
          Regarding stocks, IMO the market took on a completely different character directly after Powell’s June 23 House testimony.
          I dont know why, but I can guess the inflation readings will come down pretty dramatically going forward just because of the YOY calculation and what happened 12 months ago.
          But the damage of inflation will still accumulate for the increases will be stacked upon this recent spike. But the cheerleading, especially by this administration going into an election, of lower CPI readings will chase in the shorts and embolden the longs. The predicted change in Congress, the closer we get, will also be tough for the shorts.
          Sidelines is a good place sometimes.

      • DawnsEarlyLight says:

        I have no doubt, that crows are flying for their lives about now.

      • unamused says:

        It does not pay a prophet to be too specific.

        – L. Sprague de Camp

        You can’t blame yourself because the financialized economy is even more screwed up than you thought it was.

        And I did say it was going to get ugly, but then, I’m a Kassandra, and fated to be disbelieved.

        • Jim Mitchell says:

          Hi unamused,
          Thanks for the L. Sprague deCamp reference! Every book was a delight…

        • phleep says:

          Good point. I discovered one day around March 2009 I was fighting the Fed. I’d locked in a nice loss and it cost me several years of savings, and a bit of heightened anxiety in that economy. Nice tax deductible losses for along time though. Crow is a heck of a menu item when it has hard-earned cash behind it.

        • unamused says:

          “Crow is a heck of a menu item when it has hard-earned cash behind it.”

          Nothing takes the taste of shame and humiliation out of your mouth quite like Be-bop-a-ree-bop Rhubarb Pie.

          Humble pie, I don’t have a recipe for that, and Steve Mariott isn’t returning my phone calls.

          Yvw, Jim.

        • Venkarel says:

          If you are like the Trojan princess then you are destined for a much worse fate than disbelief.

      • Nate says:

        Buffet made tons of bad plays. I remember him buying euros for some reason at the top. Crow eating outs you in good company.

        Predicting the future consistently is fucking hard. I’ve given up and mostly passive everything and spectate.

      • DR DOOM says:

        Wolfs call on Q2 was as American as baseball. You win some, you lose some. He made his play and left it on the field for all to see. That’s as straight up as it gets.

      • Sams says:

        Now how do it taste?😉
        Actually, a question totally on the side, why the expression eating crow?

        We are then back to the first question, I did hear something that crows actually taste well. The bird that is. Not crows living on peoples waste, but those living in nature.

  16. Jackson Y says:

    The Federal Reserve is plagued by mission creep.

    I think the Federal Reserve Act’s dual mandate should be amended to a single mandate (stable prices), like many foreign central banks, and leave unemployment relief to Congress.

    Congress has far more powerful tools to fight unemployment & target aid to those who most need it. (Technically, Congress also has tools to fight inflation, but austerity policies are always politically unpopular.)

  17. MarkinSF says:

    “Residential fixed investment: -14.0%, after two quarterly gains.”

    What is this exactly? I assume it consists of investment in residential real estate? Do we know the components?

    • Wolf Richter says:

      Construction of residential buildings, such as houses, apartment and condo towers, etc., plus expansion and major remodeling of existing residential buildings.

    • Wolf Richter says:

      I called out the annualized figures twice:

      1. when we had the plunge…
      https://wolfstreet.com/2020/07/30/no-gdp-didnt-plunge-32-9-in-q2-it-plunged-a-still-terrible-9-5-time-to-kill-annual-rates/

      2. When we had the spike (the article you linked).

      But no one at the BEA listened to me, and we still only get annualized figures, and I hate them, but I couldn’t get the BEA to change, and so I gave up, and I now toe the line and use them too. Because if I’m the only one out there that uses non-annualized figures, it gets way too confusing.

      Also, a bunch of detailed data in dollars is only available to me as “annual rates,” such as “$20 trillion annual rate,” which is what comes out of the black box at the BEA. Even in the article you linked, all the detailed data is “annual rates,” because that’s the only type of data I have access to.

      The whole reporting system is geared toward “annualized” numbers, and for me to try to fight this is useless. I gave it a good shot, and it had no effect ;-]

      • VintageVNvet says:

        Start making up your own such numbers Wolf.
        Yours would likely be at least as good as BEA, probably better, and you could probably deliver and ”opionate” every bit as much data with far fewer than the 5,000 folks allegedly working there.

  18. Butters says:

    Powell’s legacy is hundreds of millions dollars he’s gonna leave behind to his kids, and he doesn’t want to risk not being friends with people who have made him this rich.

    • Flea says:

      Until they starve things don’t look good for food production

    • SoCalBeachDude says:

      Jerome Powell makes less than $200,000 per year.

      • Trefoil says:

        When he steps down he will be paid obscene amounts to speak by the bank and investment firms he was overseeing before.

  19. DawnsEarlyLight says:

    Looking at REAL and NOMINAL GDP. WTF!!!!

  20. Tom S. says:

    Inflation is not done being elevated and real GPD has stayed negative as a result. People are still demanding, and getting, raises or moving jobs for more money. No visible curtailment of spending in my neck of the woods. But it does appear commodity prices in some areas are moderating, although the street has forgotten about the volatility of commodity prices. Oil may have room to run yet.

    Real gross domestic income being positive is an interesting anomaly, although I don’t think it got updated today.

  21. sunny129 says:

    Why the Mkts rallying?

    Fed’s possible pivot!?

    “not even 15 minutes into the press conference, the fireworks went off!
    In particular, when Powell said: ‘‘We are now at levels broadly in line with our estimates of neutral interest rates, and after front-loading our hiking cycle until now we will be much more data-dependent going forward.’’
    MW

    • Jackson Y says:

      With inflation at a 40+ year high and unemployment at a 60+ year low, how could the “neutral rate” possibly still be 2.5%?

      It was only 15 years and 2 economic cycles ago, in a much weaker economy, when 4-5% federal funds rates were considered neutral.

      • Wolf Richter says:

        I’ll just repeat it here: there is a misconception about “neutral.”

        “Neutral” is a straight line that doesn’t change over the years – whatever level people think it might be and there is disagreement on that. Powell thinks its 2.5%, others think it’s around 3% or 2%, etc.

        The actual term is “longer-term neutral” — so over the years – usually abbreviated “neutral.” The “longer-term neutral” doesn’t change. The longer-term inflation rates are around that range. What this means is that under normal conditions, with inflation at 2% give or take, over the years, neutral would be about 2.5%, Powell’s terms.

        There is no agreement what rate actual longer-term neutral is. But if you have an inflation spike, this “longer-term neutral” – whatever rate it may be – doesn’t change. But monetary policy changes, and you might go above “neutral” to address this situation. And now, as Powell said, the Fed’s rates will go “moderately above neutral” by year end.

    • SoCalBeachDude says:

      Because a lot of the market participants are delusional stupid and in total and complete denial of reality and facts.

  22. Arya Stark says:

    Wow, everything got cheaper today and by cheaper I mean way more expensive. Great job JP!

    To quote one of my favorite songs, “Same as it ever was, same as it ever was”.

    Sorry folks, this will not end how you think it will/should. Good luck fighting it.

    • DawnsEarlyLight says:

      Know your limits, and know your resources. Use them to your advantage, resistance is futile.

  23. Michael Engel says:

    1) In the last four Qt real GDP was : 78.695/4 = 19.673T. Y/Y well above 18.938T the previous four quarters
    2) Gov spending is down in real terms. Unemployment payments, SS,
    checks for u and me… are down. Our gov spend less, while gov debt deflate with negative rates. Next year the gov will collect more taxes from retirees and the the lowest quintile employees. COLA will raise SS, min wages are up. The poor and retirees will reach the min IRS threshold faster.
    3) Private Investment is down. Intel agree, MSFT CEO don’t.
    4) inventory is up. Retail Inventory/Sale is rising from the lowest bottom.
    5) The trade deficit is down, because dxy is up.
    6) WolfStreet charts are best.

  24. Butters says:

    Mortgage rates dropped by 25 basis points. LOL

    • Arya Stark says:

      And amzn and appl just blew away earnings. Hope you didn’t sell your 401k! Did you sell your crypto at the bottom? Oops

      There’s a lot if Gen z’ers laughing their ass off at us old folks.

      • jon says:

        I sold amzn at $180 :-( last year

      • SoCalBeachDude says:

        Amazon racked up a $2 billion dollar LOSS for each of the past 2 quarters and is closing distribution centers and firing people as it OVERFLOWS with vast excess industry and future LOSSES.

      • Einhal says:

        And Amazon and Apple blowing away earnings means that the tightening is not even close to done. You realize that don’t you?

  25. nsa says:

    Just the facts ma’am….famed econ pundit Joe Friday.
    1) Inverted 2 vs 10 yield curve denoted the last 7 of 7 recessions.
    2) Inflation has never been curbed without the FFR exceeding the CPI at some point. 0% FFR with -2% CPI anyone? Just kidding.
    3) FFR minus CPI now at a record low going back to 1950.

    • John says:

      On the Fed website it’s balance sheet has increased by $8 billion since July 6th. Why the increase if QT in play?

      • Wolf Richter says:

        John,

        You clueless lying troll:

        1. Since July 6, total assets FELL by $2 billion. You don’t even know how to read the balance sheet.

        2. Treasuries roll off mid-month and end of month, and the end-of July roll-off is not included in today’s balance sheet which was as of Wednesday, July 27. Next Thursday’s balance sheet will include the July roll-off.

        You don’t know crap because you never read anything here, or else you would have known all this because I wrote about it gazillion times.

        READ THIS, ALL of it, and make sure you understand EVERY part of it:

        https://wolfstreet.com/2022/07/07/feds-qt-kicks-off-total-assets-drop-by-74-billion-from-peak-new-era-begins/

        • Depth Charge says:

          “John,

          You clueless lying troll”

          This is one of the many reasons I love Wolf. Straight talk, leaving nothing to the imagination.

      • Einhal says:

        Down $9 billion this week, and that’s before the monthly run off that will show up in the 8/4 numbers.

        Still happening way too slow. The Fed should be outright selling.

  26. Uber Driver says:

    “Consumer spending is hanging in there, outdoing this raging inflation, in part due to the strong labor market and sharply rising wages.”

    And the markets clearly do no believe that Powell will raise rates to stop a price-wage spiral. Wages for the top 10% may be skyrocketing but those in the lower 90% aren’t seeing much respite. Rents up 20-30% and they get a $1 an hour raise. You can’t square Walmart being backlogged with inventory as a sign of a robust consumer. I believe that the top 10% are buying their apple phone toys but everyone else is struggling. The Fed took a fire hose of liquidity to the markets in 2020. Leverage is piled on leverage and they are going to keep those plates spinning. House and rent prices will never correct with half measures.

    Powell will be cutting sooner rather than later. He slow walked the rate hikes so he would have an excuse.

    • Einhal says:

      I agree with part of this. The Fed’s excess liquidity largely ended up in the hands of the top 10%, and they’re out buying toys, spending at restaurants, and so forth, and all of that is majorly affecting inflation.

      I’ve said it before and I’ll say it again. Unless the Fed pops the asset bubble, inflation isn’t going anywhere.

  27. Michael Engel says:

    AAPL is up 3% in AH. We are hooked on AAPL. AAPL is hooked on
    China. AAPL lever is slowing down.
    China might slow AAPL lever further down to create a stock markets plunge.

    • Flea says:

      No way Apple made numbers this shit is fake,China shutdowns there consumers turning against American products less production and broke ass America,s are buying like crazy . WOW delusional

      • The Real Tony says:

        Agreed as I’ve watched the Apple stores in Ontario, Canada and foot traffic is way down.

  28. CreditGB says:

    Consumer spending is up!

    I used to spend $3.99 for a 15 ounce package of graham crackers.

    Now for the same thing, I spend $4.59 for that package of graham crackers that only weighs 12 ounces.

    Wonder if this little scenario scales up to trillions in the spending on your charts.

    • David Hall says:

      Florida homeowner’s insurance premiums almost doubled in two years. That may have increased nominal GDP, but not real (inflation adjusted) GDP.

      • phleep says:

        Maybe folks think if we plunge ahead as if we are still booming, we will stay aloft.

    • Wolf Richter says:

      All this data is adjusted for price increases or also called “inflation adjusted” or “real.” It says that gazillion times in the article.

  29. The Longer View says:

    Wolf makes a good point about direct foreign sales to U.S. consumers via the Internet. Which, by the way, are darn difficult to accurately measure. Which has led to recent speculation in the Wall Street Journal that import figures are understated.

  30. Augusto says:

    Personally, I think people are determined to enjoy their summer and are spending money according. In my view, this vacation spending is what is holding up personal consumption. That being said, a lot of working people are stretched and cutting back n already simply out of necessity. My best guess, is that this fall, when everyone is back at work and school, the consumer will close their wallets and the economy will fall off a cliff. Then wait for the stock market melt down in October just as it did in 2008, and as it always does in these types of situations. The chickens will becoming home to roost this fall.

    • tom20 says:

      Remember well the fall of 08.
      This one will cut deeper. Grateful to be debt free
      and cash heavy this time around.

  31. JeffD says:

    So Prime Rate is now 5.5% and Mortgages are at 5.22%. Something is rotten in Denmark. The Fed needs to outright sell MBS to meet its cap, and get mortgages rates to at least match prime.

  32. Pancho says:

    Your JPOW trade was a bust today!

    • Wolf Richter says:

      Yes, the second leg collapsed at 10:30 am today. The first leg (yesterday) did fine. It would have been a hoot to have it confirmed a third time. But didn’t happen.

  33. The real issues are offshore, and if I had to make a case for linking Powell’s speech to markets rising, I would say that is the dollar. Gold did catch a bounce today. Means yields and rates are coming down?? Or our inflation is here to say. They jack rabbited stocks after today’s close. Fed kills off the tight labor market, who benefits?

    • Sams says:

      Sri Lanka may default on debt. Ukraina have asked all debt payments to be postphoned.

      There is a lot of US$ debt offshore, to debtors that may not be able to pay. Now, what will happen to the US$ when debt is not paid?

  34. John says:

    $280 billion stimulus package just passed by Congress. Intel getting some of that $50 billion. Who needs QE when more money being printed for Wall Street. I’m sure the average American going to benefit from this Wall Street stimulus package

    • SoCalBeachDude says:

      That was only passed by the SENATE and now needs to be debated on and reconciled in the HOUSE.

  35. Michael Engel says:

    AAPL will gap up and close May 4/5 gap.

    • SoCalBeachDude says:

      AAPL is headed for a 90% or greater drop in price.

      • HowNow says:

        And your reasons for this are…???

      • The Real Tony says:

        I hope you’re right and if the entire stock market wasn’t 100 percent rigged it would probably also drop about 90 percent back down to fair market value.

  36. RickV says:

    “Private inventories rose by 2.9%, adjusted for inflation.” Its hard to see how this statement stacks up against the BEA Analysis which states: “The decrease in private inventory investment was led by a decrease in retail trade (mainly general merchandise stores as well as motor vehicle dealers).” Also, Table 3, Line 40, Change in Private Inventories, -106.9. Could you clarify? I suppose it could be that even though investment in inventories fell, sales fell more, and inventory therefore actually increased. Crazy.

    • Wolf Richter says:

      RickV,

      OK, this always comes up because the BEA is talking about a percentage change in a growth rate … it’s talking about a rate of a rate.

      1. Look at the chart of private inventories, in dollars, and you’ll see that it rose in dollars and in percentage terms.

      2. In Q1, inventories jumped by 6.8%, and in Q2, on top of that jump, they jumped by 2.9% (all annualized). So in Q2, inventories increased GDP in dollars. But because the percentage increase in Q2 (+2.9%) was smaller than the percentage increase in Q1 (+6.8%), it reduced growth RATE of GDP.

      In other words, it increased GDP in dollars, but it reduced the percentage growth RATE of GDP.

  37. Jackson Y says:

    The treasury yield curve is currently inverted.

    Why can’t the Federal Reserve sell off some of its bloated $9T balance sheet, especially treasuries with longer maturities, and uninvert the yield curve?

    Instead of their current baby QT, which only allows a limited amount of existing bonds, mostly shorter-dated ones, to roll off without reinvestment each month?

    Seems like a more practical solution if they wanted to avoid a recession, no?

    • Wolf Richter says:

      I think the Fed just doesn’t want to be accused of targeting specific asset classes or assets. They put this on automatic pilot in order to deflect that kind of criticism. But yes, it would be much more effective if they sold bonds with long maturities, and sold off lots of them when yields drop.

  38. SoCalBeachDude says:

    Yield curve flashing warning signs AGAIN…
    ‘Zoomtowns’ see home price cuts…
    100 Wealthiest Lose $622 Billion…
    Bloodbath for tech giants…

  39. SoCalBeachDude says:

    Rough day for tech giants: Amazon posts $2 billion loss for second straight quarter as shoppers return to stores while Apple profits fall 11%

    • Bobber says:

      Interesting. The general media is presenting (selling) the Amazon and Apple results to be very positive.

      The scam artists on Wall Street are desperate to keep this ridiculous bear-market rally going.

      But let’s recap: GDP growth has stalled. Inflation remains high. Long-term interest rates will likely rise as QT takes its toll. Bear market rallies are known for extremely quick turnarounds.

      What’s to like about the next 6 months?

    • The Real Tony says:

      Apple profits fall 11% with a 9.1 percent inflation rate.

    • Arya Stark says:

      Yeah real rough day. This week has proven the fed is not going to stop inflation in any meaningful way. Ignoring reality doesn’t change it.

  40. JGP says:

    I suspect Consumer Spending is strong because we consumers know that our cash is plummeting in value. Once we have done with all our planned spending, we will cease and desist. Unless the money supply continues to expand, and then we might be looking at hyper-inflation.

  41. Michael Engel says:

    1) The nominal GDP took off in a straight line from 19.477T in Q2 2020 to 24.852T in Q2 20222, up 27.6%, the sharpest vertical rise.
    2) The real GDP went up from 17.258T in Q2 2020 to 19.806T in Q4 2021.
    Since Q4 2021 it’s down to 19.682T retracing less than 5% of the move from Q2 2020 low.
    3) The nominal GDP might soon reached a climax. A sharp correction will follow.
    4) In real terms this correction will be deeper.

  42. ItsAPonziScheme says:

    Line goes up

  43. Einhal says:

    I’m trying to read through the various narratives, and they’re not consistent.

    Cramer is writing that the “recession” means the Fed is done tightening, which means it’s a good time to buy stocks.

    “Investors” are supposedly cheering Apple and Amazon’s results, but there’s one major problem. If Apple and Amazon had “blowout” quarters, that means that the inflationary pressures that they’re seeing on their end isn’t affecting their sales/earnings. In other words, they’re successfully passing the costs on to their consumers, and their consumers are still spending, which means inflation is not “peaking.” Not even close.

    The result of this is that if the Fed’s (relatively meager to date) rate raises and QT were intended to jawbone inflation down, it’s not working. They’re going to have to get way more aggressive.

    • The Real Tony says:

      If Cramer was around in the summer of 1929 he would have told everyone to buy stocks then.

  44. Ulysses Rex says:

    Re: Consumer Spending Rose Despite Raging Inflation

    I am always puzzled by the single minded focus on “spending” and never on what they are getting in return.

    Also, is it possible that Consumer Spending Rose BECAUSE OF Raging Inflation which, at least, is the case in my personal situation?

    And why do they never ever talk about the Producer Producing side?

    • ru82 says:

      “Re: Consumer Spending Rose Despite Raging Inflation”

      It makes sense. Consumers are spending more to get the same amount of stuff. They can spend more because they are employed and getting raises.

    • Wolf Richter says:

      Ulysses Rex,

      The overall economy is measured in two ways:

      1. by consumption and investment (GDP)

      2. by income (GDI)

      In theory over the long term, they should be about the same.

      There are plenty of production measures, and we cover some of them here, but in the end, what is produced must be sold, and therefore flows into spending, consumption, investment, or exports, which are all part of GDP.

  45. dang says:

    The measurement of national output is measured by the GDP calculation which is not precise or particularly accurate but is the best benchmark we (Keynes ?) have defined.

    The current trend of GDP measurements are confusing as would be expected given the disruption of the past several years. Negative GDP usually means the onset of a traditional recession in which the majority of Americans are economically punished by a decrease in income as a result of uncertainty by the capitalists. Currently, the unemployed seem to be in demand, relieving the urgency to, at least be able to eat and drive to “work”.

    • dang says:

      Historically, recessions ushered in an economic transition, as will this one. The economy is synthetic, still under the spell of the QE pill.

      One of the psychological problems with growing old is the chaos that change causes. Growth is the antithesis of stability.

      The GDP report was troubling, reflecting the anemic energy of a serf colony.

      • dang says:

        As the markets soared this past several weeks, the description of the 1929 crash by John Galbraith in his very readable book, “The Great Crash”, whispers in my ears.

        The current market valuation metrics exceed the 29 market by a hefty margin. The market rallied in the summer of 29 after a bear market decline in the spring.

        The excesses were brushed aside by the least recognized human emotion: The need for titillation.

      • dang says:

        Personal Consumption Expenditures plus Government Expenditures plus Exports minus Imports.

        Since the US is running a chronic trade deficit, the consumption components have to exceed the negative export component too register a positive GDP by, at least, the amount of the trade deficit

        • dang says:

          Yesterday a young person asked me if they should sell their diversified portfolio to avoid the train wreck my aging peon mind imagines and have been preaching. I told her:

          There has never been a 12 year period in which a diversified buy and hold portfolio has lost money. So you are 30 year old, maybe you shouldn’t sell since you have 45 years to go. Historically, those that sell, planning to time the market, lose money. You have to have a diversified portfolio or all bets are off.

    • dang says:

      Life itself is an unrecognized gift given freely by the people who have nothing to gain.

      Except that other human emotion beyond titallation we all need, love.

  46. DV says:

    The pattern is not recessionary, but stagflationary. Meaning that the economy is not actually growing, but nominal GDP is rising and this is what the monetary authorities welcome whatever they say, as it helps to keep many things in check – debt, stock market (which has by now been adjusted to more reasonable levels by movements from both ends), China’s competition, employment, etc. It is not clear for how long the stagflationary pattern can continue without triggering much more adverse trends, such as massive manufacturing contraction and savings erosion (the latter is less of a problem for the US, where savings are primarily in real estate and stock/bond market and there is so much debt that shrinks with inflation). We are already seeing the sharp drop in residential investment and the slowdown in the private investment. You should certainly see a new wave of off-shoring/friend-shoring, in services in particular. What FED is doing is essentially trying to stop prices at these elevated levels and then let them continue to grow at a much more moderate pace. Commodities, for example, tend to fall back, but their floor is going to be much higher than the previous cycle floor (it was 30 to 40 for oil, now it is certainly 50 to 60, but more likely higher at 55 to 65). It is not clear whether they will be able to succeed as services just started to catch up with goods and energy.

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