We are on the cusp of the College Football Season. While most seasons I get excited as my two teams, Oklahoma and Minnesota, have bowl possibilities, this year may be a rebuilding one for both. My Athlon Football preview is floating Alabama as having another big year. Once again, I will look to see who can knock Nick Saban and the Crimson Tide off the top position. The SEC is packed with great teams and is always a fun conference to watch.
This past Thursday the initial second quarter read on GDP came in negative. In the past, two consecutive quarters of negative GDP growth has indicated we have entered into a recession. Past recessions had a couple of twists that we are not seeing right now.
In the past, recessions have always included a rising unemployment rate. We are currently at full employment with many existing job openings going unfilled.
Selectively, the consumer is still spending. I say selectively when I look at the types of purchases that are strong as well as which are weak. Low end retailers are seeing inventory piling up. At the same time, Ford indicated that they can not keep higher end vehicles on the lot. Mercedes Benz is now well behind in production, trying to keep up with the demand. Chevrolet has an over abundance of low and mid level vehicles on the lots. Travel continues to be a focal point with airlines struggling to keep up with the demand this summer. Those that have jobs and are well trained are seeing their wages increase, have the liquidity as well as a brighter outlook for the future. The Michigan Consumer Expectation index this week ticked up, in spite of being in a recession. That rarely happens.
The supply chain issues could be a major factor in the decline in GDP. If manufactures can not get specific items for the process, it will slow production, causing issues with GDP growth. The demand appears to be there, it just can not be filled until the parts can be delivered.
The level of inflation is stifling specific spending. Particularly in the more common, lower items or services, demand has declined. Haircuts and other delayable services are down. Again, the lower income earners are getting crushed by inflation and are having to choose what to purchase and what to delay. As the level of inflation continues, that impact will continue as more on the margin begin to struggle.
The question now is will this be a soft landing recession, a drawn out painful economic down turn, a quick rebound or are we facing a period of stag-flation like the 70’s.
The Durable Goods Report, the labor reports as well as, surprisingly enough, the Federal Reserve rate move indications are pointing to a soft landing with a likely stag-flation period which will be the norm for some time. The Durable Goods numbers for June were good, primarily due to an increase in defense spending. The Durable Goods Orders rose 1.9% in June. If you take out transportation, the number was .3% indicating that vehicle sales are still going strong. If you take out defense spending the durable goods number was .4%. With the upper income consumers still spending, that would promote a softer landing.
The Initial Jobless Claims for July was down to 256,000 from the prior number of 261,000. Continuing jobless claims were also down from the prior report by 25,000. This is another sign of a strong labor market. Again, if those with jobs feel good about the future and their jobs, they will continue to spend, even with the inflation level.
Lastly, While the Fed raised the discount rate by 75 basis points this past week, they continue to be in an accommodation phase. With the inflation rate over the past year being 9.1%, a fed funds rate of 2.25% is hardly what anyone should consider restrictive. When the inflation rate was this high in 1982 the Fed Funds rate was 11.5%. Interest rates have to be above the inflation rate to slow things down enough to get inflation under control. Chairman Powell and the rest of the Federal Reserve Board members continue to be behind the rate curve if the real plan is to cut the inflation rate.
Based on the indicators, we are going to see a prolonged period of stag-flation.
Have a good week.