2022-07-26

It's Not a Recession. It's a Depression.

The ruling class is out in force with redefining a recession. Here's why it's a waste of time.

AP: EXPLAINER: How do we know when a recession has begun?

By one common definition, the U.S. economy is on the cusp of a recession. Yet that definition isn’t the one that counts.
The U.S. isn't on the cusp of recession. By the common definition of negative growth in two consecutive quarters, a recession is already six months-old if BEA reports a negative number on Thursday.

As for definitions, they can be flexible. I don't think a bear market is a 20 percent drop in stocks. Every correction from 2009 to 2021 was a correction, not a bear market, even though stocks fell 20 percent or more at times. What's the quibble with the recession definition?

But economists say that wouldn’t mean that a recession had started. During those same six months when the economy might have contracted, businesses and other employers added a prodigious 2.7 million jobs — more than were gained in most entire years before the pandemic. Wages are also rising at a healthy pace, with many employers still struggling to attract and retain enough workers.
(long string of expletives)

Excuse me FRED, can you drop some tactical nukes for me?

FRED: Sure thing boss!

Great, let's start with rising wages. Adjust those for inflation would ya Freddie?

FRED: Incoming!

Real wages are plummeting. Seems consistent with ye olde recession.
The job market’s strength is a key reason why the Federal Reserve is expected to announce another hefty hike in its short-term interest rate on Wednesday, one day before the GDP report. Several Fed officials have cited the healthy job growth as evidence that the economy should be able to withstand higher rates and avoid a downturn. Many economists, though, are dubious of that assertion.
Shall we drop another tactical nuke on their critical meme infrastructure?
At best, labor is a coincident to lagging indicator. If the recession is already six months old and labor didn't start turning down until April, there could be a lot more pain ahead. As in, this recession isn't going to be some dip in activity, but something that at minimum will be a three to four quarter protracted contraction. Looking back, I see they revised GDP to make the 2008 recession much longer than originally recorded. It had been a mild contraction, barely scoring as a recession. I have contended for months that even if not a recession now, the BEA would eventually revise this year into a recession.
The Fed is also trying to combat raging inflation, which reached a 9.1% annual rate in June, the worst mark in nearly 41 years. Rapid price increases, particularly for such essentials as food, gas and rent, have eroded Americans’ incomes and led to much gloomier views of the economy among consumers.
Inflation creates a price illusion. Only looking at wages, revenues or GDP makes one think there's growth. The number is going up. Adjusting for inflation reveals the more activity you engage in, the more money you lose because it's happening with devalued currency. .

Look at the imploding retail stocks as an example. Retailers bought goods expecting to sell them amid high demand, but demand was fake. It was inflation. Supply chains helped disrupt the timing, but also the economy rapidly shifted as inflation came out of the economy. They should have never ordered the inventory. 

Nobody knows how deep this incoming economic malaise could get because it is still wholly distorted by a CPI still running at above 8 percent over the past 12 months. The CPI is rapidly decelerating though. The Cleveland Fed's Nowcast for July is down to 3.3 percent annualized. I don't annualize to forecast, but merely to show how fast the monthly CPI numbers can collapse. If highly efficient companies such as Wal-Mart report department "growth" that could be more than 100 percent price gains (I don't know that this is true, I've only see reported sales figures for various firms that are below the CPI), it indicates the collapse of inflation could reveal widespread economic losses. Wal-Mart is probably a winner in this environment too, keep that in mind.
It did in the first three months of the year, when GDP contracted 1.6% at an annual rate. Economists have forecast that on Thursday, the government will estimate that the economy managed to grow at an annual rate of just below 1% in the April-June quarter, according to data provider FactSet. If accurate, that forecast would indicate that the economy isn’t technically in recession by any definition.

Even if growth does go negative for a second straight quarter, Fed officials and Biden administration economists point to a lesser-known measure called “gross domestic income.”

GDP calculates the value of the nation’s output of goods and services by adding up spending by consumers, businesses and governments. By contrast, GDI, as the name implies, seeks to measure the same thing by assessing incomes.

Over time, the two measures should track each other. But they often diverge in the short run. In the first quarter, GDI grew 1.8% — much better than the 1.6% decline in GDP.

As part of its judgment of whether an economy is in recession, the NBER considers an average of the two measures. In the first quarter, the average was 0.2%, suggesting that the economy expanded slightly.

This isn't an argument devoid of logic. There have been near-miss recessions in the past. The flaw here is inflation. It assumes these numbers are accurate and won't be revised in the future. Given the high rate of inflation, I'm highly confident future revisions will be negative.

Consider these charts and comments from Jeff Snider:

In two weeks, the spread between the 30-year and 3-month treasuries has been cut in half. The 3-month is only pricing in a 50 bps hike too. If the Fed goes ahead with 75 bps, my hunch is the curve could invert tomorrow or quickly after the initial chaotic frenzy in markets.
Arguing over the definition of recession is missing the forest for the trees. Something wicked this way comes.

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