The much-awaited and hoped-for slowdown in the second half turned into a drunken party in Q3.
By Wolf Richter for WOLF STREET.
This was Fed Chair Jerome Powell’s reaction this morning when he saw the Q3 GDP report, as captured by cartoonist Marco Ricolli for WOLF STREET:
In Q3, all our drunken sailors where at it together in one huge party – consumers, businesses, and governments. Maybe they’ll slow down in Q4, maybe they’ll slow down in 2024, or whenever. But in Q3, they drank directly from the punch bowl.
GDP, adjusted for inflation (“real GDP”), jumped by an annualized rate of 4.9% in Q3 from Q2, following the 2.1% increase in Q2 and the 2.2% increase in Q1, according to the Bureau of Economic Analysis today.
All major categories, except the trade deficit (which worsened), increased sharply, adjusted for inflation:
- Consumer spending (69% of GDP): +4.0%.
- Gross private investment (18% of GDP): +8.4%.
- Government spending (17% of GDP): +4.6%.
- Private inventories increased and added to GDP.
- But the trade deficit got a little more horrible and an bigger drag on GDP.
Obviously, as we can see from the chart, big increases are generally followed by smaller increases, or sometimes quarter-to-quarter dips. And that history of quarter-to-quarter changes alone, without knowing anything about Q4 yet, would lead us to expect a smaller increase in Q4. That doesn’t mean the economy suddenly hit an air pocket, but that growth reverts to trend.
GDP in dollar terms: In current dollars, not adjusted for inflation, “nominal GDP” jumped by 8.5%, to $27.6 trillion annualized. This represents the actual size of the US economy, measured in today’s dollars.
GDP adjusted for inflation via 2017 dollars rose 4.0% to an annual rate of $22.5 trillion, depicted in the chart below. You can see the sharp acceleration of growth in Q3. All figures below are adjusted for inflation via 2017 dollars.
Drunken sailors #1: Consumer spending on goods and services jumped by 4.0% annualized and adjusted for inflation, after the revised 0.8% increase in Q2 and the 3.8% increase in Q1. Consumer spending accounted for 69% of Q3 GDP.
- Spending on goods jumped by 4.8%, including a 7.6% spike in durable goods (think autos).
- Spending on services jumped by 3.6%.
Drunken sailors #2: Gross private domestic investment spiked by 8.4%, after the 5.2% jump in Q2. It accounted for 18% of GDP.
The fixed investment component within gross private domestic investment ticked up 0.8%, of which:
- Residential fixed investment: +3.9%, after six quarters of declines.
- Nonresidential fixed investments: -0.1%, after seven quarters of increases:
- Structures: +1.6%.
- Equipment: -3.8%.
- Intellectual property products (software, movies, etc.): +2.6%.
Drunken sailors #3, oh my: Government consumption and investment jumped by 4.6% to a new record. In total, it accounted for 17% of Q3 GDP.
Q3 was the fifth quarter in a row of steep increases, driven by the most recklessly drunken sailor of them all, the federal government, which is now blowing borrowed money helter-skelter in every direction.
- Federal government: +6.2% (national defense +8.0%, nondefense +3.9%).
- State and local governments: +3.7%.
Government consumption and investment does not include transfer payments and other direct payments to consumers (stimulus payments, unemployment payments, Social Security payments, etc.), which are counted in GDP when consumers and businesses spend or invest these funds.
The Trade Deficit (“net exports”) in goods & services got a little more horrible:
- Exports: +6.2%.
- Imports: +5.7%.
Imports subtract from GDP. Exports add to GDP. Imports is a much larger dollar figure than exports (hence the trade deficit) and therefore the 5.7% increase in imports was in dollars larger than the 6.2% increase in exports, and thereby the trade deficit worsened.
The historic stimulus-driven buying binge of goods in the US during the pandemic caused the trade deficit to totally blow out. Over the past six quarters, it recovered a little, but not nearly enough:
Change in private inventories added 1.3 percentage points to GDP. Changes in inventories count as a business investment. Inventories rose in Q3, to $2.94 trillion, in inflation-adjusted dollars. You can see the inventory shortages that ended in the second half of 2022, when restocking efforts began to bear fruit:
In Q3, all our drunken sailors had a blast. The much-awaited slowdown in the second half has turned into a drunken party in Q3. Maybe Q4 will finally bring some sense to the drunken sailors and cause them to sober up. But that may be wishful thinking, and the party may go on. It’s not hard to see that inflation isn’t going to just vanish in this environment. When business investment takes off like this, and when government spending, particularly at the federal level takes off like this, and when consumers are blowing their big pay increases and their newly discovered interest income left and right, a slowdown is just hard to imagine. What is easier to imagine in this scenario is more persistent inflation and therefore higher for longer interest rates.
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I love the 2nd and 3rd charts. Practically straight line. You’ll need a pencil and a ruler. Central bankers really know what they are doing.
That’s the thing. The morons spend their time arguing over the experts and seeking out “alternative news” to prospect some nugget of “Truth”, whereas the people who actually do move the needle, they straight-up communicate what they want moved, and how it is going to move in the news at 19:00.
Well, Fed rate has gone up only 0.25% in last 6 months as high inflation has changed course to be higher for longer. So Powell should have seen this coming. The way everyone read it was “Fed rate will not be high enough for longer”.
I am expecting CPI for October to cross 4%, and waiting for Powell to say – “The increase in inflation will be Transitory”. That will give everyone a firm message to stay away from long term treasuries causing their yields to blow higher. This should happen because “The guys who bought long term treasuries believing Transitory BS last time are well underwater now.
I posit much/most of the spending by all categories of sailors is deficit spending. Unsustainable with follow through ramifications.
I love them too. Not because they are artistically attractive, but because they illustrate the insanity of the current age. Which we all are pretending is normal.
Having been alive for seven decades, I’ve lived through the whole thing. It never seemed normal. Especially those blessed wonder bread years.
I’m glad someone is enjoying this economy even if I’m not.
Cool, looking forward to couple of more rate hikes, the return on T bill is looking better and better :)
Don’t forget QT
I think that the Fed has to increase the FFR by 25 bpt. Otherwise, inflation will stabilize at the current level, a poison for the ideal of democracy, freedom, and America.
Good on the Auto workers obtaining a work contract that pays them a fair wage and benefit package. It’s been a long time since labor was able to challenge the executive sweet for their earned, piece of the pie.
I would rather live in a democracy than the current aristocracy.
They need to drain dollars more quickly. The course they’re on is meandering. Fewer $s in the system makes much of this go bye bye.
Unfortunately, the FOMC is looking for any excuse to be done hiking. Should they do 2 more hikes this year? Yes.
Will they hike at all? Probably not.
This doesn’t fit with my preferred doom and gloom narrative and therefore I will ignore it.
There is an old Wall Street saying, never underestimate the American consumer. These kinds of numbers are going to put the Fed in a box. They will be damned if they do, and damned if they don’t.
Another old Wall Street saying… “Never Fight the Fed.” I haven’t really heard it much in the past few years. I guess they will have to re-learn it.
I don’t think Powell is tearing out his hair.
PCE inflation increased at annualized rates of +2.9% and +2.4% ex-commodities in Q3. Not quite 2%, but not far away either.
Federal Reserve officials have made it clear the only form of economic “overheating” they care about is inflation. Strong GDP growth, jobs market, etc. are good, as long as they don’t increase inflation. And in this quarter, they didn’t.
Obviously, those things are good. The question though is whether they can maintain a good job market while getting inflation under control. I don’t think they can.
They have so far.
As Wolf posted yesterday, unemployment claims are far below a recession indicator. Below even the good times during the decades of the 80’s,90’s, 00’s, and 10’s.
No, they haven’t so far, because inflation is not under control.
Inflation seems under control to me. There was a big jump in prices last year, but they seem to have stabilized and some are even dropping. Of course, that is just on the things I tend to buy. YMMV.
Kent, 4-6% annual increases in prices, even if you accept these numbers, is not under control.
Those would be good things if they were true.
The PCE numbers for September are released tomorrow. How can you know annualized PCE inflation for Q3 already? September saw a spike in gasoline prices so your ex-commodities figure is particularly suspect.
From the BEA release today — but these are different metrics than what we get tomorrow:
“The price index for gross domestic purchases increased 3.0 percent in the third quarter, compared with an increase of 1.4 percent in the second quarter (table 4). The personal consumption expenditures (PCE) price index increased 2.9 percent, compared with an increase of 2.5 percent. Excluding food and energy prices, the PCE price index increased 2.4 percent, compared with an increase of 3.7 percent.”
Which metric does the Fed look at?
The the monthly “core PCE price index” we get tomorrow.
BTW, GDP is a lot more than consumer spending. For GDP deflator purposes, the metrics need to be far broader than CPI or the PCE price index in order to deflate GDP across all accounts.
The Federal Reserve Board and Powell must understand that interest rate on savings must be high enough to offset the benefit of buying now. I do not think that most drunken sailors #1 are spending out of fear of rising prices, but when you expect higher prices next year than today then you may as well buy now. We know inflation expectations are elevated for our drunken sailors #1 and combine raises and higher savings rates they feel more comfortable about buying now instead of saving for a rainy day.
Boomers “spend now for tomorrow we die”.
True enough!
Does that matter that much?
The big driver may be governmental spending, or rather increasing governmental spending. I guess quite some of that +8% defense spending end as wages and compensations to workers that already is well paid. After the defence companies and contractors have got their share to raise revenue.
No, the biggest driver is consumer spending = 69% of total GDP, and it rose 4.0%.
Government is only the third-biggest driver.
I did think of the govermental spending as fiscal and monetary stimulating to the economy. The debt financed rise in governmental spending can be looked at as an economic stimulus to the rest of the economy. Not QE, but the effect may be much of the same.
If the government instead raised taxes to run a budget surplus and pay down debt that would maybe act like QT and supress inflation.
I still don’t think consumer spending is a health measure of the financial wellbeing of a nation.
But then again, I’m from Ireland…nothing makes sense here anymore.
Nothing happens in an economy until someone spends some money. That’s one of the most fundamental economic principles.
Longtimelurker, that theory would explain goods spending, not services.
There aren’t many services you can “prepay” for.
Funerals?
Holiday spending will cause the party to continue well into Q1 next year… after that who knows.
Inflation is firmly entrenched in the economy and consumer mindset. Better buy it now before the price goes up.
Christmas and credit, the drunken sailors favorite combination.
or just pick up overtime and pay cash. peeps do that as well.
Anyone talking of a “recession” will be laughed out of the room now. The soft landing now is a rocket launch.No wonder with these deficits. And they have barely started.
That means rates on the long end are much too low. 10Y should be at 7% at least, 30Y at 8%. And Taylor Swift tickets will be in the thousands.
Charley Crockett tickets are still reasonable, if you’re into Country Western.
The small-business recession that everyone is missing
Small businesses are critical to the health of the U.S. economy, as Edwards noted, with firms of fewer than 100 employees creating 63% of all new jobs between 1995 and 2021. Small businesses also currently account for roughly 43% of U.S. gross domestic product, according to the U.S. Chamber of Commerce. But with the availability of loans for small businesses falling, and the cost of the remaining loans rising, it’s been tough treading for mom-and-pop operations—especially when compared with their larger competitors. Small-business credit conditions are “at recession levels,” Edwards claimed.
Overall, Edwards believes that the latest positive GDP and unemployment reports, as well as the stock market’s positive performance this year, are simply “disguising the depth of pain the Fed has inflicted on the economy, which will soon be obvious to all.”
Availability of loans? Maybe not; maybe just the cheap money is gone.
My small business (Wolf Street Corp) gets constant fliers on paper from banks that I do business with and from PayPal which I also use, exhorting me to take on a working capital line of credit or a term loan. So the loans are available. But I don’t need a loan, and in general, demand for loans is down because it’s more expensive to borrow. I’d have to pay 9% or 10% in interest. I’d really have to have a good business opportunity that would make it worthwhile. And that’s actually good – it’s a good discipline that makes for good decision making and effective capital allocation; now businesses borrow to fund worthwhile projects, rather than to fund goofy stuff, such as share buybacks.
Powell is not tearing out his hair, he is quietly smiling and celebrating. He wants this.
Seeing new 2024 3500 series trucks filtering into the lots. Price tags are approaching $110,000. Helluva f***ing job at debasing the currency. Just beautiful.
DC
Looks like you might have to get a real job in a cubicle while driving a Corolla.
I could pay cash for one if I wanted, because I’m self employed. Did you ever get a job after your little stimmy checks ran out?
If you are so flush, why do you whine about the price ?
That undermines your unsubstantiated boast.
I hear he’s making ends meet on OnlyFans.
“If you are so flush, why do you whine about the price ?”
This is one of the dumbest comments I’ve ever read on this site – a financial site where a person has been visiting for years yet still does not understand price vs. value, or currency debasement. Wow. I mean, WOW.
Rich people are not rich by giving away money. You get this way by making good money decisions.
Poor people often do not understand this and think people with money can just afford to be ripped off. They do not understand that if you let yourself get ripped off then you quickly become poor.
This is why most people who win the lottery jackpot end up back on the street in a couple years.
My daughter is now paying $2,500/month for child care for one kid. Up from $1,500/month last year. These inflation figures are bogus. Anyone who believes them should buy one of my bridges I have for sale over the East River in NYC.
The inflation figures are fine, your brain is bogus. Just because one item that only some people use jumps, doesn’t mean all prices for everyone across the entire nation jump.
Used vehicle prices are now plunging. Electronics are dropping. Airline fares have dropped a lot (we got a pretty good deal flying direct SFO to Frankfurt, in fact, best deal ever, with United!),, etc. etc.
You just refuse to look at what is dropping, or not moving up, and you’re just citing one single item that jumped. That’s a sign that your brain is bogus.
Yeah, that’s fine, but people who are frugal can avoid buying cars, vacations, etc.
They can’t easily avoid buying housing, education, health care, hair cuts, dental cleanings, oil changes, and the like.
And those things, in my experience, are out of contorl.
Some expenses are discretionary other are a necessity.
Einhal, I’m going to nitpick your oil change example because that is the definition of a discretionary purchase.
Just do it yourself – you’ll save time AND money. I started doing my own oil a year ago and haven’t looked back. 5 quart jugs of 5W-30 are $20 at the local costco.
MM,
Same with hair cuts. Been cutting my own since the pandemic. Works great, saves money and time, and is kind of fun (playing with power tools). I’ll never go back.
Also lots of free education on the internet. You can basically learn to do almost anything watching YouTube.
You can even learn to do oil changes and cut your hair.
This free education has moved the bar on what is now discretionary.
Absolutely Wolf – my buddy and I have been cutting each other’s hair for the last year to save money.
I also switched to making coffee at home instead of getting Dunkin/Starbucks etc.
This inflation has taught me that I don’t really need a lot of the things I thought I needed.
@SC Everything is not up over 60% like your daughter’s child care and some things are down like the cost of a 6 foot diagonal TV. in the late 70’s you could buy a new Porsche 911SC for less than $23K and half the homes in CA for less than $80K (the CA median home price in the 1980 Census was $85K). The price of the Porsche is up about 5x but the median price of a CA home is up almost 10x since the late 70’s.
Who cares about the price of a 6 foot diagonal TV? Is this the most important item in life. Give me an old black & white TV. Easier on the eyes.
I should quit my engineering job, come to the US and open a hort for 10 kids.
How is that kind of money justified? Why not take care of your own child plus 2 or 3 more and make bank? How do those prices not lead to an abundance of childcare options?
What on earth do the prices of trucks have to do with the value of the US Dollar at all?
It fits a preferred narrative.
Just as much as anything else. Try to keep up.
And I cant sell pristine low mile 2002-2010 trucks for $8-$12k cash only which should sell quickly. Credit rules! Deficit spending YOLO is raging. $110k for a truck? House sellers making an economy? Something not right and that something might be everything. Worlds most epic wealth transfer in history(another word for inflation is wealth transfer).
Do you have a website? With the outrageous prices of trucks these days, I think a lot of people would be interested in the prices and conditions you state, maybe not many are aware of your business. Do you post on Craigslist, for example? Lot of traffic there.
Autotrader. Where reputable sellers sell.
The big increase in interest rates has had a big stimulating effect on consumers who save, probably mostly retirees, because they are the big savers. Going from almost nothing to 5.5% on T-bills and some CDs in a year and half is like free money to savers. They are not going to blow it like drunken sailors, but they are likely to spend a lot more than two years ago. Wolf has mentioned this in some of his earlier articles. It should not be underestimated. For me personally, it is like getting a $50,000 raise. Higher, longer.
It’s about time!
Maybe we need to come up with a new term…
“Spending like drunken Seniors”
And the overspending US consumers state once again: “There may be things money can’t buy. I’m not interested in them.”
Nor do they seem interested in financial common sense. This level of consumption really does have an Armageddon-ish feel to it.
Maybe, maybe not. This article doesn’t dive too deep into what people are spending on. Some people maybe having a great time, others are still experiencing declining purchasing power. I am in the latter group with day care costs for a 3y/o and in January, an 8th y/o who we hope can skid a grade to save us some money. With wage spikes, some people are probably feeling it a lot harder and spending a lot more for the same services which I do not think gets reflected in the above charts. Some areas have improved, like beef and gas, but still doesn’t make up for others. Perhaps these pay rises are biting certain consumers more than others, i.e. Walmart keeping costs down with automation, while other employees are forced to pay better wages and passing the costs along.
What happened to Magnificent 7 the last couple of days?
Even small caps are barely green today. Ridiculous. Anyone seen this coming?
Yes. Its called the mountainous downside to the charts’ mountainous upside. Nothing personal, its just how manias go. If you haven’t done so, I recommend looking at a fun chart: all the dead cat bounces for the years that followed the 1929 peak bubble mania. Not that we have any similarities today…The Govt. was in much better fiscal condition then. Just for fun.
The markets always lead the economy.
DJ
MW: The 7 companies propping up the U.S. stock market are sending a bearish warning that investors should not ignore
Icarus.
…I wondered where all of these feathers and bits of wax were coming from!
may we all find a better day.
NASDAQ has broken through all moving averages (200, 100, 50, 20) now. It even broke the (2,20) Bollinger Band to the downside, which is – remarkable, especially with the speed it happened. Momentum looking ugly.
This is fine.
I’m so confused at this point. Does this make the soft landing less or more likely? IS this the soft landing? What are we landing on? Who’s flying this plane? Are there in-flight snacks?
Howdy Poor like you. A decade or more before your questions will be answered?
I think economy is landing right into that cliff face right there ——>
To stay with aviation terms, could be that we are heading for a CFIT, controlled flight into terrain.
You know that Far Side cartoon when the pilot suddenly ask, “What do that goat do in the clouds”.
SC
It is truly amazing that your world class angst and pessimisn hasn’t killed you.
Of course, you are really portraying a gross misunderstanding and distortion of history.
And the present as well……
But I am commenting on Wolf’s articles indirectly. His articles trigger thoughtful comments.
They also trigger inane comments.
I tend to comment on the inane distortions of his excellent articles.
The only inane comments I see are from you, OTB.
I think you took a wrong turn somewhere.
MW: US stocks close at lowest since May as Nasdaq sinks further into correction territory
At least in the 70s we had a more culturally homogenous population. Today, we have a Balkanized mess.
E
Feeling outnumbered are we ?
No. I’ve just seen in my lifetime how America has gone downhill, and I think “diversity” is a big part of it.
I’ve visited Japan several times, and their economic problems aside, they’re doing something right.
I’ve seen pictures of how they dressed in the 1970’s, it was definitely a Balkanized mess.
You are always free to leave, Einhal, if the population is too diverse for you. Of course the “diverse” population includes most of the people who do real work supplying the food you eat and the buildings you work and live in.
My family has been here for hundreds of years. The American population does not support mass third world immigration. It’s been foisted on us by the elite.
Einhal’s bigotry won’t solve national economic issues sadly, just make him stand on his front porch with a shotgun afraid of anyone who is different. LOL
CNN headline:
“Chipotle Mexican Grill easily tops earnings estimates, as price hikes help offset higher food prices”
This my friends, is entrenched inflation. They can just raise prices because consumers are willing to pay them, irrespective of their inputs. And this phenomenon is playing out throughout the economy.
Chipotle is like $20 now. I made a burrito at home. Arguably 80% as good as Chipotle. Cost is probably 3 bucks. And no mystery meat.
Atta way! The antidote for inflation: tell Chipotle to stuff it. You’re probably get a healthier meal making it yourself, maybe 80% better. I’m telling Netflix to stuff it. They’re raising rates on the old movies they keep recycling, calling them new and popular. Stuff it, I say.
some people are so brainwashed by chipotle.
Try Qdoba sometime, their offerings are cheaper and used to taste better than chipotle.
I went to a chipotle once and you can hardly make any suggestions before they speed make your burrito.
Then it’s like sitting in a post apocalyptic modern dining area. No thanks.
Yeah I won’t eat it anymore either, but it’s more the fact that companies can keep raising prices with nary a peep of protest from their customers.
I don’t see any end in sight.
If you look at the trajectory of 2 points on the consumer spending chart, say 2014 and 2018. Then the line (if it goes on forever) will take you to exactly where we are now. So the spending does not seem more than usual, to me. Even after the 2007-2008 crashes, it hardly dipped. What a 4% decrease then?
Howdy Folks and you are welcome. Old squirrels know when to spend.
I am a ‘cursing drunken sailor’. I curse everytime I buy anything but I go on and buy it so based on this statistical field of 1 person, me, I think inflation is now embedded in the economy and I don’t know where it ends. We had 4 recessions in the 70s- early 80s before it ended.
For my wealth protection I am holding to the mantra of the 70’s that one own things (which includes stocks) and not cash or bonds during inflationary times. I think it may matter what stocks you own and of course timing matter near term.
My stocks pay relatively large safe dividends and are in sectors that will have large growth if this planet is not going to hell over the next few decades.
Place your bets for are all of us ate in the game, even those whose assets are buried in their back yards.
Stocks are dropping atm.
I keep yelling at my screen “stop that!” while pretending I’m in a Lewis Black (comedian) rage.
Ha
I’m down 11% since Biden took office and buying CDs with savings every month. Not swift enough to buy Treasuries like many on here.
Oh well a monthly ladder for the coming year should work as well as an IRA in the 80s.
Im running 4-week experiment with Treasury Direct with T bills. They should send money back into my bank account in two weeks or so. Probably easier than any CD, better interest, no state tax, and no worries about missing maturity date. You can set up how many times it renews. Tottaly automated.
Buying treasuries is easy – you can buy them thru most stock brokerages (look in the fixed income section) or TreasuryDirect.gov.
CDs are good too – but T-bills accomplish basically the same thing as <=1 year CDs, without being subject to state income tax.
YIelds on bills and CDs with <1 year maturaties have been remarkably similar lately, but CD rates tend to take longer to react to changes in market rates.
A hospital system near me lost 1/5th their value by playing the market in 2022. 250ish Million $. Phew
I read it in their public balance sheet.
CEO still has his job somehow.
Also buying the 4-week T-Bills with the automatic reinvestment. I’ve read the interest is safe from state income tax. Tactic should work as long as QT continues.
I am seeing Lewis Black tonight!
Hope he was good!
Love that guy!
So you have large safe dividends and large growth at the same time. That is pretty cool. Wish I knew how to do it.
He said relatively large safe dividends and he is projecting the growth. When stocks (companies) go belly up there goes the projected growth and possibly the safe dividends.
TXRancher,
Big diversified miners don’t go belly up. BHP Billiton has averaged a 15% return over the last 5 years and has been around for over 100 years.
Belly up is mostly reserved for speculative growth companies that amateur investors are fooled into.
Look for mutual funds and ETFs marked “Income and Growth”, then see which ones are weighted towards large companies. AT&T’s dividend is running 7.4% right now. The stock may be going down today, but it will bounce with the rest of the market when that time comes.
Hey Andy,
I am mostly in large diversified miners like BHP Billiton and Rio Tinto who historically pay large dividends. Miners are cyclical so sometimes share prices can drop quite a bit but they recover quickly because you can’t build much without metal. I think they are a good bet against inflation and the future. We are going to need a lot of copper/lithium/rare earths/steel/…to deal with the warming.
The steel is in that list because it appears to me that the global-south is going to require more infrastructure before they will be willing to quit burning coal for energy. More economic equality.
I also like the green energy companies, the ones that build and own solar and wind fields, for many of the same reasons including good sized dividends. They have been beaten up by rising interest rates (solar and wind fields are long term investments) but this sector started rising a month ago because I think investors are sniffing out a top in long rates (my guess).
These won’t get you home runs but I am pretty confident they will yield singles and a good batting average. Further, the dividends after you hold them for 3 months are ‘qualified’ so they are taxed as long term capital gains. So, for a married couple if your income is less than 80k there is no tax on the dividends. Most years I manage to avoid tax on my investment income.
Why so many drunken sailor’s? In addition to what Wolf wrote, remember the following:
15 +/- yrs of cheap/easy money flooding the markets forcing investors to chase yield thereby raising asset prices. This makes people feel rich, at least on paper;
Actual free money handed directly to individuals and businesses during the pandemic;
People saved $ during the lockdowns because they couldn’t do anything;
The government, at all levels, are so drunk they just gave their entire wallet to the bartender and said drinks are on us.
I read a special fed report put out October 18th.
Dunno if it was covered here, but the fed said the last 3 years were by far the biggest net worth increase in the modern era.
Lower income and minority families were largely and almost completely withheld from all but a tiny tiny increase in either salary or net worth.
34-55 year olds saw very healthy salary increases
And the top top people gained the most advantages, partly cuz they own businesses, stocks, property etc.
Yeah, but net wroth is in nominal terms.
If you judge net worth by what assets or goods/services it can buy, it paints a much less rosey picture
I think this blast is mainly fueled by the $400B printed by the FED in the Spring 2023. The party began in spring after this printing spree, spiked in the summer and is still going on. Although the FED pulled this money back, the change of psychology induced by this printing is phenomenal.
FED inflated the prices once again in the spring and now all the consumers, investors and govt are absolutely sure that FED will not tolerate even the slightest sign of panic in the markets and will immediately start printing money again whenever a reckless financial institution is in trouble. So, they are all spending like drunken sailors, as they have their trust in the FED. So, I don’t see any recession in the foreseeable future nor a return to the 2% inflation.
The Federal Reserve did not add any money to the economy and did not inflate anything at all, but rather merely provided very short term funding to a few banks and then withdrew that.
SoCalBeachDude: How was the source of that funding generated? By printing money of course. You can name it differently. But in the end, it inflated its balance sheet (again), which directly translated into the asset prices.
Yes, it withdrew the money later, but its action heavily emboldened all kind of risky investors and consumers with its message.
Yep, exactly. While asset bubbles can often be attributed to money printing, psychology plays a big part. You don’t actually have to print money as long as people believe (rightfully or not) that you stand ready to do so.
It’s the same phenomenon that has been written about on this blog regarding corporate bonds. In early to mid 2020, when the Fed announced it would do that, the private market front ran it and did it instead, making the actual program unnecessary. But the psychology changed.
There is a saying in my business – “it doesn’t matter if its a good deal, it only matters if the customer THINKS its a good deal”.
That is rather silly. The average American didn’t even hear about those bank bailouts… didn’t benefit from them… and certainly didn’t respond to them by going on a spending spree.
In fact I suspect that the consumers are simply responding to an inflationary spiral… better to spend money today rather than watch it get devalued tomorrow.
Pulling his hair out?
I thought I saw him nude with a bottle of bourbon leaning on the Washington Monument.
As Bernanke polishes his Nobel Prize for “can kicking”.
I predicted in this column that the Fed would fail to produce a soft landing with the policies that they were implementing. Raising interest rates like they did without any subsequent cut in Federal Spending meant the Fed would have to monetize much of the debt while raising rates, producing more inflation and raising the costs of doing business for all small and medium size businesses which are passed on to the consumer. Now we have a bond market crash that they are directly responsible for. Interest rates are rising even without any Fed action because of supply and demand factors. The whole economy is headed for a hard landing or better yet a crash landing. Looks like the 500 Phds (Piled High and Deep) at the Fed all got things wrong and we’re all going to have to pay for it.
Lol. Your description of Powell is the caricature that should be published….He may be doing crack after the 4th quarter GDP report!
Random thought. It’s been said that the 7 Bigtech stocks are holding up the market. Is that the case, or are those 7 companies literally taking over the entire U.S. economy?
No matter what happens, their revenues in all segments seem to grow out of control every quarter.
Good question. I did not spend a single dollar with any of the great 7.
Those 7 seven companies are just the most overvalued stocks. People want to make money fast in the stock market, so rather than planning on long term safe investing, they jump on the same trends everyone else does. Because everyone does this, you wouldn’t be a very good investor if you didn’t also jump on the roller coaster.
A good example is that Vietnamese electric car company a couple months ago, people knew that regardless of rather or not that car company will actually be a big deal or not (in terms of marketshare), it’s stock would be big. Electric car companies are a major trend to invest in. Alot of money and losses to be made on that ride.
Right now, I’d say consumer electronics is at or near peak, which is most of the 7 companies. Most will still be big and around for awhile, but not as profitable or prominent.
Alot of the big coming AI advances might be difficult to keep a monopoly on. For instance, some countries might require self driving cars to be based on open source software. This means the software is free for anyone to use and to analyze to see why it’s making the decisions that it is. As for the better robots in factories, there could be a gold mine in that, but ripping off the programming, might cause a bunch of knock offs that will prevent large monopolies. Right now, the more automated factories use large amounts of highly custom machines. One of the theoretical designs for factories of the future is simple human shaped robots that more directly replace people. Alot of interest in the tech companies is based on stuff like this. But, the robots will be standardized, meaning the tech might be ripped off, relatively quickly. Some of these things are potentially too big to not rip off, right now, for instance the EU keeps attacking US tech companies, because the EU’s aren’t as good. If suddenly more meaningful tech arrives the EU might have state sanctioned reverse engineering (rip-off) programs.
People have money to stick into the market, so these 7 tech companies are just sucking up a disproportionate amount of that, if trading were halted on them, alot of the money, that would have gone to these stocks, would flow to other stocks. Though, not all of it.
Right, but my point is that their revenues and income seem to grow enormously every quarter. If that continues in perpetuity, are the stocks actually overpriced?
I always thought at some point Microsoft and Google would hit their limit on being able to grow 20% per year, but they never seem to.
There are several theories for how stocks should be appraised. One is that stocks should be appraised at how much they pay out in dividends over some period of time, Say 15 or 30 Years.
Another is that it purely is how much you can get out of it. This is more speculative.
Right now, I would say all 7 big tech stocks won’t be able to maintain their current revenue or profits for very much longer, because I think that consumer electronics is peaking. Meaning that they are in fact hugely overvalued.
Some people think that these companies will take over other sectors such as self-driving cars or other AI advances and such they will keep going up, this is in theory, possible. But, I’m not so sure they can maintain a monopoly over such tech. If they could maintain monopolies/oligopolies over such tech, then they are not over-valued.
Another theory of stock investing, is to simply look at it as a form of savings/diversification, with this theory, there is a complicated method that varies between investors on where they think is best to stick their money in order to grow/safeguard it, with this method, I’d argue that these stocks are over-valued, but possibly still among the best stocks/places in general to stick your money in.
People chase winners until they stop winning. Tesla, Bitcoin, etc. Plenty of examples out there to choose from in the past year or so without going to Wolf’s list of imploded stocks. Eventually P/E ratios revert to the norm… and then we all talk about the brilliance of the short sellers.
Is there research or empirical evidence as to whether QT or rate hikes are more effective in combatting inflation? I understand from your excellent detailed posts that the fed has been doing both for over a year now, and that even on the few occassions it paused it continued QT. Since rate hikes cause direct pain to the ordinary person, could the Fed decide to stop rate hikes and to just keep going with QT? Or are the two measures really different in their impact on inflation? If not, then the rationale for holding off on investing in bonds “because” the Fed will have to continue rate hikes is false, no? (Unless other major economies keep hiking?!)
I don’t think rate hikes cause pain to the ordinary person, only to those who are living beyond their means by using too much debt, Overall I think due to poorly educating our youth about being responsible and careful with money. It seems logical that substantial QT does more to reduce the conditions for inflation since that’s less money to buy up bonds (returning rates to appropriate levels), rents, autos, other assets. So as has been stated many times, if the powers that be do what’s right and do a lot of QT to clean up at least some of the terrible mess they made, it will keep yields up and prices down, helping everybody by getting our nations back on a stable track.
QT has never been done, anywhere, on any real scale. In the US specifically the money supply had never contracted for more than 2 months in a row before 2022. Uncharted waters, nobody knows.
However, it’s worth noting that QT in the the UK is running at roughly 2x the pace seen in the US, and the results are not compelling, Plenty of articles here on WS re: UK/EU inflation patterns for reference
I am likely an exception but I 100% telework. I full my RAV4 once a month on average and have to pay for no parking. On top of that I get $50 per month telework pay. The government I work for in term rents fewer buildings and less utility costs. Admittedly there are some departments that are 60% telework but most are less. All told this puts $400 a month in my pocket not counting less auto maintenance and lunches out, so I have been spending it. Admittedly not everyone’s case but teleworking in still the norm in my city.
I used to telework 100%, but switch to a new .gov job and telework 50%. Our office of three was refurnished for almost a million bucks, plus new furniture, because … The reality is 90% of my job is behind my laptop. The other two people I work with will call me on the phone rather than walk a few feet to my office. In reality, if I wanted to do my job really well, instead of being in the office, I would go out to the field for oversight work, but due to the cost of the renovations, I need to have field folks leave their work and come see me. Our organization could save the taxpayers a lot of money of embracing 100% remote work with coming to the field to exercise oversight duties, but instead, the desire is to have people in the office so we can have all hands meetings, cook outs and jersey day, i.e. waste time with nonsense because work is the social life.
Wolf,
Do you think that the “velocity of money” calculation provides a useful way to look at the GPD increase in the face of QE?
The metric is coming off a series low according to FRED. The “velocity of money” might increase by roughly 60% from here and still stay within the historical range. That suggests that not only is “money” coming out of whatever its unused locations where it’s been sitting dormant since roughly 2008, but also that there’s plenty of room for QE to run before the money supply makes further inflation impossible.
Milton Friedman’s income velocity, Vi, is endogenously derived and therefore contrived (N-gDp divided by M) whereas Vt, the transactions’ velocity of circulation, is an “independent” exogenous force acting on prices.
The transactions’ velocity of money can move in exactly the opposite direction as income velocity. Vi is a “residual calculation – not a real physical observable and measurable statistic.” Income velocity may be a “fudge factor,” but the transactions velocity of circulation is a tangible figure (debits to deposit accounts).
See: https://fraser.stlouisfed.org/files/docs/releases/g6comm/g6_19961023.pdf
“The earliest form of the velocity of money was formulated to show a relationship between the quantity of money and the value of all transactions. This is very different from the current formulation, which draws a relationship between the quantity of money and GDP”
I recognize that the current “velocity of money” number published by the FRED is a contrived value, that’s a fudge factor between the money supply and the GDP. The importance of it to me is that the M2 money velocity as published by FRED has a historical range between roughly 1.6 and 2.2.
If the current value according to FRED is 1.3, then in theory the nominal GDP could be significantly higher than it currently is. It’s also surging upward, which is what a person might expect to happen if the “animal spirits” drive spending higher and faster. In addition, with current technologies ability to accelerate fund transfers, we might expect the velocity to go even higher than the historical range, so that’s also sigificantly more than where we are at today.
So once the inflation fire gets started, this is yet another reason why inflation might tend to remain “sticky”, as the velocity of money can increase significantly on a declining stock of money to support higher and higher nominal GDPs that are created by higher prices pushing higher inflation. I think it provides a frame work to think about why inflation might not come down soon, even as the money supply falls.
The “Great Inflation” was due to the monetization of time deposits (the transition from clerical processing to electronic processing and the end of many gatekeeping restrictions).
The S-Curve” hybrid dynamic damage (sigmoid function) in money velocity, was completed by the first half of 1981 with the widespread introduction of NOW accounts.
Automated Clearing House Payments | Federal Reserve History
Check Payments | Federal Reserve History
Fedwire | Federal Reserve History
Money demand is viewed as a function of its opportunity cost-the foregone interest income of holding lower-yielding money balances (a liquidity preference curve). As this cost of holding money falls, the demand for money rises (and velocity decreases).
As Dr. Philip George says:
“The velocity of money is a function of interest rates” and
“Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits.”
Link:
https://fred.stlouisfed.org/series/LTDACBM027NBOG
Link:
https://fred.stlouisfed.org/series/RMFSL
The money supply is the denominator in velocity calculation.
As the Fed’s QT rolls on, the money supply will drop pushing velocity reading up, theoretically
The everything bubble will everything bust – it always looks optimistic at the top.
I have notice that the “HELP WANTED” signs here have mostly disappeared from retail stores & eating places.
But some billboards are still advertising factory type jobs.
Just anecdotal. But likely a sign that things are cooling off here in Fly Over country.
OG, as a sign that everything is local, in my area of Fly Over Country it is hard to find a store or restaurant that doesn’t have “help wanted” signs up.
I read these things and try to figure out where to invest. Interest rates are high, consumers are spending money, lots of people working and a mid-east war.
So I added a Senior Loan ETF and continued speculating on oil.
Charity gives the best return. No need to read mumbo jumbo research and wonder how true it is.
The economy is up but the stock market is down? The stock market isn’t the economy.
The reason why Powell is tearing his hair out in the cartoon isn’t that the economy is strong, it’s that the results were much stronger than Economists expected. No runway in sight to land on, let alone a soft (or hard) landing.
It seems the Fed should resume aggressively hiking rates. TFW you have too much economy
J Powell and Janet Yellen will go down in history as two of the dumbest people ever to occupy key financial leadership positions in the US government. They are destroying the standard of living of the average hard working American and their families. Those who have played by the rules are laughed at, while the rich and con artists have prospered. They had a chance to do the right thing and have failed miserably in everything they have touched. END OF STORY.
Living conditions of production units dont matter. Stock prices matter. If the production units cant afford rent they can live in a car or tent. For Powell or Yellen to risk hurting the Job Creators stock portfolio would be a crime on par with the destruction of the Temple of Jupiter.
Absolutely correct. And don’t forget the fine work done by the Bernank when he was there. Everytime I read something credited to Mother Fellen my brain 🤕🤕🤕💸🤡💸🤡
We have been talking about the huge GDP for months. Atlanta Federal Reserve GDP Now Cast has been predicting near 6% GDP.
https://www.atlantafed.org/cqer/research/gdpnow
near 6% early on, but then 5.4% at the end. Pretty good prediction. The range of the “blue chip economists,” shown as blue area, topped out at 4.6%.
I think this strong GDP growth is why tech stocks are dropping. It means there will be no rate pivot, so growth stocks must be valued using a higher discount rate. This might continue for a while.
Evidently, tech stocks (many industry’s stocks) are dropping because the “guidance” is tepid. There may be a cyclical slowdown of growth underway, not necessarily a recession, just a slowing of growth.
But generally, the market precedes a cyclical turn, up if the cycle is going up, down if it’s slowing. This is earnings season, so the quarterly results are moving the market. And, it’s reflecting slowing growth at the moment and/or disappointing earnings. Future earnings will be weighed down by higher borrowing costs.
And the rising interest on bills, notes and bonds that are risk-free is turning the market to risk-off.
Just my opinion…
in the foreign exchange markets and bond markets this intuitive concept has sometimes powered a narrative which drives long-term US interest rates and the dollar upward in tandem
U2 is selling out three times a week in Vegas @ 500 USD !
GDP, adjusted for inflation (“real GDP”), jumped by an annualized rate of 4.9% – Wolf
4.9%, q/q, SAAR
economy expanded at a robust 4.9% annual rate – Politico
Is the seasonally adjusted annual rate always the real rate?
Where do I hear “inflation rate” or GDP Deflator?
How about an inflation based federal tax deduction. Like reduce your taxable income by (100- adj inflation). If inflation is 8%, subtract the expected 2%, then multiply your taxable income by .94.
It’s not like we don’t know what inflation is – the Fed government generates and uses that #. After all, SS recipients get raises based on inflation. Might reduce the incentive to create inflation in the first place.
Historically this isn’t surprising. The postwar inflation of 1946 was caused by a similar bulge in consumer wallets after a period of high wages and limited spending. It took 3 years of steady inflation before the bulge was used up.
Who says that Keynesian economics is dead?
“In fiscal year 2022, the US federal budget deficit was $996 billion. The just-ended fiscal year 2023 saw that figure rise to $2.02 trillion. And while those figures explain why there is no longer a scarcity of safe Treasury assets, sending long-term yields higher, they also explain the US economy’s resilience. Deficits are effectively net financial transfers from the public sector to the rest of the economy. So the US economy in 2023 has been getting a huge trillion-dollar boost in financial wherewithal because of that deficit spending. This graphic from the Congressional Budget Office gives you a sense of the difference between 2022 and 2023.
Nothing the Fed has done will overwhelm this enormous transfer. So if you didn’t see the massive 2023 federal deficit coming — and I certainly didn’t — you wouldn’t have predicted the resiliency of the US consumer. “?
Let’s be clear and complete about Keynes.
His deficit spending ploy was to terminate when the issues of concern were resolved. For years intelligent people pleaded with the Fed to withdraw the “punchbowl’…but alas did not.
The Govt and the Fed forgot this step.
Yes, lets not confuse Keynesian economics with one-side Krugman money printing “economics”.
1) Option I : SPX 1D, Oct 2022 low to yesterday close, parallel from July
27 high. The lightweight correction will soon be over. SPX to 5K min.
2) Option II : NDX 1D, Sept 1 to Oct 12 highs, parallel from Aug 18 low to Oct 26 close, to yesterday close. After five waves down the trend is down. The 7 drunken sailors got a cold shower after the ME Oct 7 “event” hit
QQQ assets.
A fair return on one’s money IS and “economic engine”. (don’t tell the government). Spurring economies with fake low rates is vastly overrated.
It is really a case of who gets to spend….
for 14 years it was the government benefiting from fake low rates from the Fed….and they spent wildly and created massive debt.
Now, the earner/saver/consumer gets the benefit of the rate structure (albeit a still inadequate compensation for the inflation that occurred and is baked into the new pricing structures)
What would the GDP look like without Taylor Swift concerts and Barbie Doll movies? /s
Productive economies are funded by high real rates of interest channeled into real investment outlets.
For example if the debt was acquired to finance the acquisition of a (1) (new-security), the proceeds of which are used to finance plant and equipment expansion, or the construction of a new house, rather than the purchase of an (2) (existing-security) or to finance the purchase of an existing house (read bailout), or to finance (1) (inventory-expansion), rather than refinance (2) (existing-inventories).
The former types of investment are designated as (1) “real” as contrasted to the latter (2), which constitute “financial” investment (existing homes).
Financial investment provides a relatively insignificant demand for labor and materials and in some instances the over-all effects may be retarding to the economy.
Compared to real investment, financial investment is rather inconsequential as a contributor to employment and production. Only debt growing out of real investment or consumption makes an actual direct demand for labor and materials.
The federsl govt is draining money from private sectors to fund their spending orgy. Unproductive exercise to your point.
“Pay workers to dig holes”
“Pay workers to fill the holes back in”
$timulus!
You spelled tumulus wrong
Wolf,
Something that you haven’t really addressed – a HUGE amount of this growth in GDP is due to this rapidly accelerating flight of foreign investment from China, with a massive amount of re-shoring and near-shoring going on.
The Ukraine War has also forced a huge amount of German and other European companies to shift their manufacturing into the the US for products requiring cheap natural gas and petroleum, with the shutdown of cheap Russian gas and oil. Right now, only the US has the ability to provide a long term solution for that sort of industrial production, with the continued ramping up of shale gas and oil production in the US (and yes, I know you really poo-poo the shale revolution, but seriously, it’s real, and still powering the US energy sector).
China’s economy is rapidly disintegrating, much faster than anybody has expected due to a combination of self-inflicted wounds in terms of awful government policy (the Zero Covid shutdown being just the tip of that iceberg), a return to Maoist cultist ideology (with Xi as the new Mao), increasing hostility to foreigners and foreign investments, and the collapse of the massive amount of real estate debt loads.
There’s a lot of that stuff on Youtube channels.
So, no, it doesn’t look like the much predicted US recession is coming any time soon
I see those defense contractors and their employees are out spending their money. Good for them, they had one hell of a quarter. Fourth quarter should be good for them as well…
For everyone else on the other side of their products, not so much…
Interesting times Wolf.
Don’t be silly. Production of military equipment is a small part of overall manufacturing. And manufacturing is only one part of industrial production. And industrial production is only a smallish part of the overall US economy. So the 7% increase on defense spending by the government — with all governments and their activities combined being only 17% of GDP — has only a very small impact on the enormous overall US economy. Teacher salaries have a far bigger impact.
There is much more to military spending than manufacturing. Come on Wolf, don’t be so disingenuous.
So I looked it up for you. Everything seasonally adjusted annual rates, adjusted for inflation in 2017 dollars:
Total National Defense spending in Q3: $836 billion, or 3.1% of GDP ($22.5 trillion).
Do you see: total national defense spending is only 3.1% of GDP. So any changes in National Defense spending won’t have a big impact on GDP.
National Defense spending was up by just $15.8 billion Q-Q, out of $22.5 trillion in total GDP.
The contribution of National Defense to the 4.9% GDP increase was only 28 basis points. In other words, without the increase in defense spending, GDP would have STILL grown 4.62% 🤣
Interesting to see gov’t spend staying on a post-pandemic trend, which may actually have started in 2019. That curve really started to bend upwards in 2019 . . . I wonder what drove it.
Also, wage inflation hasn’t really worked itself into the recent numbers. This reminds me a lot of the 70s inflationary set-up as now we’re seeing strikes materialize and wage increases will be taking hold. This inflation is getting baked into the system. It ain’t going away anytime soon.
q3 2007 saw an uptick in the GDP, right before the plunge. No predictions, just sayin…
Look at the first chart: there were many big increases followed by less big increases. That’s the general rule.
Wolf, I was wondering if you’re planning on doing similar reporting on the EU.
Things aren’t the same over here and banks are still not passing on higher interestrates. Inflation is very high still and yet the ECB appears to be done.
I’d love to hear your take on this Wolf, thanks very much.
I now mostly stick to occasional inflation and ECB coverage (rate decisions and QT). I might do the Eurozone inflation indices when they come out next week; haven’t done them in a while.
I could cover consumer spending and other stuff, but it would be a lot of work, and not many people would read it. I know that from past experience. People see “Europe” or “EU” in the headline, and they’re outa here.
The only titles that would reliably work would be clickbait nonsense with “euro collapse” in it, or similar, LOL. That would bring out the euro-haters.
Yes, in terms of the banks, I noticed that when I was there: where are the 4% savings accounts and the 4% time deposits? I didn’t see any. People are still getting ripped off. So you have to buy short-term government debt; German government yields up to 1 year are around 3.7%. Italian yields up to 1 year are around 3.9%. So that’s pretty good. But if you leave your cash in your bank, you’re going to get ripped off.
People will read it if you manage to slip “housing” in the title somewhere. That always seems to get them going.
Maybe, “Housing prices, European Central Banks Bla blah Housing, Interest Rates ECB Housing”
Just because they won’t read it doesn’t mean they won’t comment! lol
I read an article on WSJ that says now is the best time to rent over buying.
Also, Invitation Homes CEO said the same thing during a current call. They increased their single family homes to rent count this past quarter. They have increased their average rental rate. He said the landlord business looks good right now with people holding off on buying a home.
I think they are buying homes directly from Home Builders.
The big landlords stopped buying homes from homeowners quite a while ago — too expensive. Now they’re buying build to rent, entire subdivisions built specifically for rental, with its own leasing and maintenance office; and some are building their own subdivisions for rent (American Homes does that).
Party is over. Looking for a real sell off.
MW: ‘Magnificent Seven’ stocks have shed more than $1.2 trillion in market valuation since the market’s July peak
“I think that what you have are consumers who are forced to pay more for rent”
How many consumers live in the absolute cheapest place they can afford, vs those who live in upscale apartments because they have cash to burn?
The latter could simply move to a cheaper apartment, or take on a roommate, if they’re really getting pinched, and the rents they pay are arguably a discretionary purchase and not one of necessity.
When I was a renter, I lived in squalor with 3-5 roommates because that was all I could afford. No one has a birthright to live alone in luxury housing.