Ahh, June 21, the first day of calendar summer. For the optimists among us it brings the hope of a new season, one filled with cook outs, vacations, trips to the beach, basking in the sun and, before the advent of seedless watermelons, spitting watermelon seed contests. For the pessimists, it marks the beginning of the diminishing daylight hours. Some even joke it is the start of winter as the days start to shorten to the inevitable first day of school a mere 60 some days away, the first true sign of Fall. Whatever your take, enjoy the summer and all the fun it can bring.
My last update noted that the numbers coming out during the week of June 13 would give us a good indication of where the economy was headed. If the numbers broke well, we could see a recovering economic environment. Conversely, if the numbers were not good, we could easily be in our second quarter of negative GDP growth indicating we have entered into a recession.
The first quarter of 2022 saw real GDP in the US drop by 1.5% based on the second estimate released recently. Dissecting the numbers is important to see where there was weakness and strength. Consumer spending was generally good during the first quarter, rising 3.1%. The job market was also strong with limited jobless claims and continuing claims for unemployment. There were three areas of concerning weakness that drove the GDP growth into a negative territory. First was a growing trade deficit. During the first quarter, consumers purchased more imported goods, partly due to the strong dollar making goods from overseas cheaper. At the same time the strong dollar made our products more expensive to our trading partners who cut orders. Business investments in inventory as well as plant and equipment faltered, causing purchases to fall. Lastly, defense spending fell off the table in the first quarter. After the pull out from Afghanistan, our military entered a mode of needing fewer pieces of equipment as well as supportive ammunition. The key questions in reviewing the first quarter include, which areas that impacted growth in quarter one is improving to avoid a second consecutive down quarter?
The consumer started out the second quarter with improved spending in the retail segment. In April retail sales grew at .7%. The May retail sales level, month over month, fell .3% reflecting the beginning of a contraction in spending for goods. Target, Walmart and other mid to low-income target marketeers are reporting inventory is languishing. Part of this is the supply chain finally catching up, producing a slug of goods on the shelves right when people are cutting back.
The inflation numbers continue to be bleak. The pain is not likely to abate as the PPI rose .8%. This is a leading indicator as companies pass on the cost increases as best they can.
Manufacturing reports from the Eastern seaboard were not good. The Empire State Manufacturing Repot for June fell 1.2% after an 11.6% drop in May. The Philadelphia Federal Reserve Manufacturing report went negative, falling 3.3% in June. This was a turnaround from being up in May at 2.6% and an even stronger showing of 17.6% growth in April. Nothing in either report reflect any optimism that the numbers will turn around in July.
Housing starts in May fell from 1.81 million to 1.549 million. This was the largest one month drop since the start of the pandemic. New housing permits dropped by the most amount since July of 2021. Both the price of the housing as well as spiking mortgage rates are driving many buyers to the sidelines to wait things out until the smoke clears.
The labor market continues to be strong with limited layoffs for now. That could be changing as many in the real estate market are just now announcing staff cuts. Redfin is cutting staff nationwide by 8%. Many mortgage companies are shedding employees and curtailing operations. Manufacturing is hiring but at a lower level.
The key will be to see if the overall numbers from April were strong enough to offset May and June’s drops. The other question mark is defense spending. From my contacts, there has been no noted increase in defense contracts or new purchases. The military items sent to the Ukraine are not stressing our current weapons inventory nor are they the type of armaments that we would typically use, they are just surplus items.
Lastly, the consumer. As stated, the strong consumer spending kept the negative GDP of the first quarter from being worse. This was led by having January retail sales at 2.7% growth, February was at 1.7% growth and March at 1.25% growth. The trend for the second quarter is not that good. Growth was only .7% in April and negative in May. If the June retail sales continue the trend, AND spending on the service sector is flat or worse, I do not see how we can escape that second quarter of negative GDP growth. I would say we have a very strong probability of being in a recession already.
Have a great week, enjoy the start of Summer