In terms of measuring the U.S. economy, there are dozens of indicators and data sets that can be used. However, all of them in one way or another have an impact on what makes up Gross Domestic Product (GDP). If you remember from prior letters, GDP = Consumption + Government Spending + Net Exports.
While we all analyze data such as unemployment, retail sales and the like to gauge the economy, we must remember, the U.S. economy is like a giant ship, turns are gradual and the ultimate change in direction takes time. Even though weekly and even monthly data is useful, GDP has and always will be the most important number when looking at economic results.
With that said, I came across an interesting chart, with an interesting result.
In the above chart, the areas marked in orange represent periods when the U.S. economy was in recession. Please take note that all of those periods came when year-over-year GDP growth was 2 percent or less.
Year-over-year GDP growth for the first quarter was 2.3 percent, leaving us little wiggle room for the coming quarters. The first estimate of second quarter GDP is due out the end of the month.
Now, this is the point where the weekly and monthly economic data sets become useful, helping us speculate on what second quarter GDP may look like.
We saw last week that the unemployment rate ticked up to 9.2 percent in June, while just 18,000 new jobs were added in the month. May retail sales dipped (0.2) percent, nearly wiping out all of the 0.3 percent gain in April. It will be interesting to see what the June sales numbers bring, considering more folks lost jobs in the month.
One piece of recent economic data that actually troubles me is consumer credit. The Consumer Credit Report, which is released by the Federal Reserve, tracks Americans debt burden. This figure rose in May by $5.1 billion, marking the eighth straight monthly increase.
What’s more, the category that covers credit cards increased, meaning more purchases were made with debt. When I say more purchases were made with debt – I mean of the purchases made, debt, such as credit cards was used more often to make the same purchases. Remember, May retail sales were down so there was actually less purchasing overall.
If U.S. consumers are beginning to finance their purchases with debt again, the outlook on retails sales is likely weak. We as a nation still need to work off the excessive from the credit boom & bust from just a few years ago.
With the above being said, I believe the likelihood of a double-dip recession is much higher than we anticipated and that it is only a matter of when, not if year-over-year GDP growth dips below the 2 percent threshold. When it does, history suggests a recession will immediately follow - adjust your portfolios accordingly.
Your getting ready for the dip analyst,
Mitch Jaworski