NEW YORK (July 25) – Gross Domestic Product, or GDP, for the Second Quarter of 2024 (“2024Q2”) printed this morning at a surprising 2.8% rate of annual growth. Consensus estimates had put the figure at 2.0%. The print was nearly double the highest point of our range of our last prognostication of growth, 1.25% (+/-25 bps) and well above the top boundary of the “Blue Chip” consensus tracked by the St. Louis Fed.
The print, together with a companion print today of Core Personal Consumption Expenditures (“PCE”) at 2.9% dampen hopes for a rate cut in September and even in this year. (Core PCE is reportedly the Federal Reserve’s preferred measure of inflation.)
Let’s look at our exclusive chart of 2024 Q2 GDP by Major Component:
2024Q2 GDP by Major Category © 2024 The Stuyvesant Square Consultancy (The Stuyvesant Square Consultancy from BEA Data (Used by permission)
The surprise upside on this quarter’s GDP was in GDI, or Gross Domestic (Private) Investment, so let’s look at that breakdown:
2024Q2 Gross Domestic Private Investment (©2024 The Stuyvesant Square Consultancy)
Notably, the change in private inventories leads the GDI component, which could – and often does – indicate a slowdown in consumer spending. It is also largely a timing difference because inventory buildups tend to reduce future production and thus GDP.
ANALYSIS & PROGNOSTICATION
We said in our last GDP report that we feared the return of Carter-era “Stagflation,” the portmanteau derived from stagnation and inflation. We reiterate that view. The economy is not “there” yet, but signals abound. First, we have an increasing rate of unemployment at 4.1%, the highest since November 2021 and 70 bps above the lowest post-pandemic low of 3.4%.
Second, and related to the increasing unemployment rate, the unemployment rate is approaching the threshold of the Sahm Rule, as former New York Federal Reserve Bank president Bill Dudley wrote yesterday in Bloomberg. The Sahm Rule, per Investopedia, states that:
The early stages of a recession is signaled when the three-month moving average of the U.S. unemployment rate is half a percentage point or more above the lowest three-month moving average unemployment rate over the previous 12 months.
As of June, the Sahm Rule Indicator stood at 0.43, just 7 bps below the half-point threshold. While opinions vary on the strength of the Sahm Rule indicator, all things considered it is a concern for us.
Third, while we’re experiencing disinflation, that is, a reduction in the rate of inflation, we’re not seeing any deflation, a reduction in the actual cost of goods. So today’s print of core PCE inflation is simply an addition percentage increase on already elevated prices. The rate of inflation, while in a slow downward trajectory, is nevertheless volatile and also not reducing markedly QonQ.
Finally, we’re hearing, anecdotal reports of consumers favoring store-brand, generic, or smaller-sized consumer packaged goods, increasing margin and volume pressures on larger, “brand name” consumer products companies. Mondelez (MDLZ), the chocolate and snack company, reported exactly that phenomenon in its most recent earnings call.
FORECAST
Were unemployment to tick up to 4.2% in next week’s report, we would trigger the Sahm Rule indicator, though it may not be the signal of the beginning of an actual recession. But it would compound the recessionary risk from the still-as-yet unresolved inverted yield curve signal that has been hanging with investors since July 2022, as discussed by S.A. Editor Jason Capul.
We expect the final print of GDP for 2024Q2 to print revised, downward, at around 2.25% (+/- 25 bps). We also have ongoing geopolitical concerns, as follows: 1. Iran is “very close” to developing fissile material, though it is not clear they intend to develop a nuclear bomb, according to Secretary Blinken and National Security Advisor Sullivan.
2. The United States has increasingly contentious relations with both Russia and China. NORAD intercepted two nuclear-capable bombers from Russia and two from China that had entered the Alaska Air Defense Identification Zone (ADIZ) just yesterday.
3. Our adversaries may miscalculate US resolve. The sudden withdrawal of President Biden from the 2024 election and the apparent promotion of a largely untested Kamala Harris as heir apparent of the Democrats’ executive branch this close to an election, and with our deeply divided national politics, could embolden adversary nations to try to gain strategic advantage. Wars – global wars – have started over such miscalculations.
We are very much troubled by the situation with commercial real estate, particularly on small and regional banks, and fear it could create a “domino” effect on regional economies.
Assuming none of those geopolitical concerns are realized, we look for GDP in the Third Quarter to print in the range of 1.75%, (+/- 25 bps). We see PCE declining due to reduced consumer resources and “bargain hunting” and lower new orders as the markets “burn off” the inventory buildup in this report.
MARKET SECTORS OF INTEREST
Long: Discount retailers and consumer services (lodging and hospitality); large financial institutions; Healthcare
Short: Regional banks, “Green” industrial companies, and ESG funds. “Magnificent 7.” Consumer discretionary. Municipal bonds.
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Note: Our commentaries most often tend to be event-driven. They are mostly written from a public policy, economic, or political/geopolitical perspective. Some are written from a management consulting perspective for companies that we believe to be underperforming, and include strategies that we would recommend for the companies of our clients. Others discuss new management strategies we believe will fail. This approach lends special value to contrarian investors to uncover potential opportunities in companies that are otherwise in a downturn. (Opinions here regarding whether to buy, sell, or hold such companies, however, assume the company will not change its current practices.)
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