How’s The Economy Doing? (Part 2)

by David Reavill

Yesterday morning, at precisely 8:30 am, the preliminary estimate of the nation’s Gross Domestic Product flashed across computers across Wall Street and the country. Believe it or not, this is a moment of high drama for many in the investing world. Significant wagers are riding on its outcome.

As we discussed earlier, a portfolio’s design has much to do with the future economic direction. You invest in growth stocks for a strong economy. But emphasize defense, bonds, and utilities, for instance, in a weak,recession-prone economy.

Yesterday’s Report on GDP showed the Economy grew by 2.9% in the fourth Quarter of 2022. The high end of Wall Street estimates, but below what most in Washington thought. The Fed and the Administration were looking for economic growth to equal or exceed the Quarter before when growth was 3.2%.

So,  “How’s the Economy Doing?” Answer it is slowing from the Quarter before. The Economy is slowing, and this is critical to recognize, but something the Press did not report. It drives me nuts to read all the headlines surrounding this Report. Headlines like “GDP Report Beats Expectation.” Reading that headline, You would naturally assume that the Economy is performing optimally. After all, it “beat expectation.” Forget expectations; they are irrelevant when determining how things are, not someone’s guess.

The Economy in the fourth Quarter of 2022 slowed from the Quarter before. (Q4 2.9% growth versus 3.2% growth Q3.) So mark it down in red letters.

Consumer spending, that’s you, and I continued strong. There was one piece of good news, but unfortunately, it comes with a caveat, actually, a couple of caveats. We, consumers, may have increased our spending in that Fourth Quarter. And that’s to be expected. Generally, the end-of-year Holidays are the most significant time for consumers to spend.

But remember, we have to deal with a couple of caveats. First caveat, consumer spending in this Report is in “constant” dollars, not dollars adjusted for inflation. Now the Report measured inflation during the Quarter at just over 3%. So, the first 3% increase in spending reflects inflation and does not reflect consumer sentiment.

The other question on Consumer Spending is what we spend our money on. Was it just a reflection of higher living expenses? Or did we go out and make a few extra purchases, the kind of purchase that would help spur the Economy? The answers to these questions will be critical in how we view the Economy this year, but we won’t get them for another month or so.

Yesterday, you’ll recall, we made a few educated guesses on this GDP Report. The first area we predicted was Real Estate. And it didn’t take a genius to predict that Real Estate was falling. Real Estate fell from the fourth-best Sector last Quarter to the poorest performer in this Report.

And if we look solely at this Report, we predict that Real Estate is leading us into recession. I’d like to see a few more data points before we make that call. And we’ll have to wait for more detail in the following two GDP updates over the next couple of months. But there’s no doubt that Real Estate is sick, real sick.

Finally, there’s that old political trick that we talked about yesterday. When the Economy begins to look a little peaked, Washington reaches back into its wallet and starts to spend and hire as many new people as possible. Yes, I know this President is the all-time champ at spending, but wait. If it looks like a recession is on the way, money from Washington will flow like water (even more, if that’s possible).

The process has already begun. Yesterday we discussed how government spending declined in the Third Quarter of 2022. Well, that was then. In the Fourth Quarter, Government Spending turned positive again, and it’s easy to predict that’s a trend that will gain momentum if the Economy weakens.

So there you have it. The first estimate on the Economy’s Performance (GDP) for the fourth Quarter of 2022. Overall a positive reading, but one which slowed from the Quarter before. Some open questions remain about what’s driving consumer spending and how much the government will spend to stave off a potential recession.

But the one significant factor that we can’t ignore is the sickly performance of  Real Estate. This Sector went from one of the most vital areas of the Economy in Q3 to the weakest in Q4. And, of course, driving this poor performance has been the rising interest rates. Oh yes, the Fed meets next Wednesday to raise rates even further. Best of luck to my friends in Real Estate. This is going to hurt a little. Brace yourselves.

PowerInbox