How’s The Economy Doing?
by David Reavill
Where is the economy headed? It’s a question I get often, and the answer is one of the most important for investors. Generally, you would rather not invest in high-growth stocks during a recession or in bonds during times of inflation.
What’s so interesting about the current economy is that we’ve dusted off an old term that economists hadn’t used in 40 years: “Stagflation.” Stagflation combines slow economic growth, borderline recession, and high inflation. You are right. Stagflation is a difficult time for all investors, as we’ve seen. For the growth-oriented investors, ones who like big-tech companies, for instance. Slow growth can be a challenging time. Have you noticed the number of recently laid-off technology workers? It’s a sign of declining earnings directly ahead.
And for bond investors, inflation quickly eats away at our returns. Yields need to be re-calculated in real terms, that is, after accounting for inflation.
Today, the Bureau of Economic Analysis, the government’s chief economic bureau, will provide its initial estimate of GDP for the fourth Quarter of 2022. This estimate is the least reliable of the three estimates the BEA will report over the next three months. Later the BEA will use survey data, corporate earnings, other reports, as well as other methods of data collection to provide a complete picture of what was happening that last Quarter of the year.
Today’s Preliminary Report on the GDP will be one of the most closely watched reports we’ve seen in a long time. There is so much that rides on this report. In Washington, President Biden is looking for good news to take people’s attention away from the growing scandal. Over at the Eccles Building, The entire staff of the Federal Reserve is holding their breath to see if the economy will sustain their next interest rate move, scheduled for next Wednesday.
Altogether, Washington represents the Pollyanna view of the economy, with the Fed and the Administration hoping to see a firm GDP number.
The Atlanta Federal Reserve Branch publishes a rolling estimate of our current GDP, and their latest report indicates that GDP grew at 3 1/2% in Q4 2022. A bullish outlook and even better than the Quarter before.
But the rest of the country is not as upbeat as Washington. In Manhattan, the denizens of Wall Street have a much more dour view of our economic performance. They are as far removed from Washington’s perspective as I’ve seen. Wall Street believes the economy will be lucky to grow at half the rate that Washington sees.
The Fed’s latest Blue Chip Wall Street Analysts survey shows that these analysts predict economic growth of between 1/4%, almost recession, and a top estimate of 2.9% growth. In other words, there is a massive gap between what Wall Street sees and what Washington sees.
The difference in GDP growth is due to Wall Street’s focus on Corporate earnings and guidance reports. While Washington is relying on more traditional data, much of which has yet to come in.
Remember, corporate results move in instantly. Those layoffs, poor earnings, guidance reports, and casual conversations hit Wall Street’s ears. Analystslysts are talking to major corporate execs, financial officers, and managers; the news must not be good. It may take Washington several weeks for their survey results to appear. But in the meantime, Wall Street is already making investment decisions based on information they now have in-house.
Now you and I can look for some things as we go through today’s report.
Last month the BEA reported on Q3 of 2022. We will likely see some significant changes from Q3 to Q4. Two of the industries that were powering the economy in Q3 were Real Estate and Retail. Real Estate was the fourth fasted growing Group for the Quarter, while Retail was the fifth fastest-growing Group. There are 22 Industrial Groups that GDP measures, so 4 and 5 mean that Retail and Real Estate were among the top quintile of all industries, based on their growth.
If you’ve read the headlines, you know it’s unlikely that Real Estate is near the torrid growth levels it reached back in Q3. The same is likely valid for Retail, where preliminary estimates are that Holiday Sales were poor.
So, as today’s report flashes across your computer screen, pay particular attention to Real Estate and Retail Sales.
Finally, there’s an old political trick that this Administration is not using. And that was a real surprise. Whenever Washington feels the country is headed toward recession, they kick the government hiring office into high gear. Add to those 2 million “.gov” workers. This make’s the employment numbers look better, as well as spreads around those government paychecks to help stimulate the economy.
In Q3, the Biden Administration did the opposite. They reduced government spending. The reduction may be relative to the astronomical spending levels the Quarter before. But no matter the reason, I’m looking for a significant ramp-up in Government spending in Q4.
So at 8:30 am this morning, the Bureau of Economic Analysis will provide its first estimate for GDP in the fourth Quarter of 2022.
Lots are riding on this report. The Federal Reserve is looking for a good reading that will support its raising interest rates. The Biden Administration is also looking for a favorable GDP report that will provide…well, support.
While Wall Street isn’t buying any of it, their estimates remain about half of the GDP Models in Washington.
Wall Street knows that there is no Growth. America is in Depression and people are liquidating assets to stay afloat. With Government (and FED) Policy turning Cash into Trash, the economic bubble is deflating fast which is why the Democrats and RINOs need WWIII.
Some people are investing in Gold and Silver. In a collapse, you can’t eat Gold or Silver, so Gold and Silver are worthless until after a recovery.
The only way out short of World War is Economic Expansion and Massive Federal Government Downsizing. That means, going all in on Energy Exploration and Expansion (Oil, Gas, Coal, Nuclear), Massive Tax incentives to manufacturing (We need to move Taiwan to America.), and a reduction in the Deep State Bureaucracy by 90% over 5 years. The Deep State Bureaucracy must be downsized by at least 25% in the the next budget (2024 on October 1) and the Budget Balanced for 2025 and Beyond.
The IRS takes in 4.9 Trillion. That’s 21% of the Economy, it should be under 10%. It was under 10%, until the Great Depression and under 5% most of our history as a Nation. Three Trillion is Obligated right now each year in permanent obligation programs like Social Security. Actually it’s 3.5 Trillion when you include the National Debt Payment. That leaves us only 1.4 Trillion. We can’t afford our present military; it needs to be cut to under 400 Million in the 2024 Budget. That’s still over 2% of GDP. We can only support a 3 Carrier Navy and half the Ballistic Submarines need to be tied to the Docks with the same level of cuts to the rest of the services. To get to a balanced budget, that means the the total discretionary spending needs to be under 1 Trillion and we need to significantly increase Border Security. That means at least a 25% cut in everything else.
No more luxuries like NPR, National Endowment for the Arts, we close 75% of our Embassies, drastically cut UN spending, no more aid to Ukraine (or anyone else), no more Earmarks, no more Department of Education, Health and Human Resources, Agriculture, Housing and Urban Development, and Labor. All these Department are a duplicate of what the States do and are just waste, fraud, and abuse. The States can also take care of EPA issues, Small Business Affairs, and even most Trade issues not needing a treaty. The Federal Government is a Bloated Wasteful Unelected Bureaucracy that needs to be sliced and diced.
In 2025, we can take serious look at repeal of the 16th and 17th Amendments to control spending and return the States to their rightful Representation in Congress. Once this is done we can look at a Balance Budget Amendment and empowering Congress to be able to Police the Bureaucracy with Arrest, Trial, and Imprisonment powers over Senior Government Employees who are appointed by Congress. We can’t have untouchables in the Bureaucracies who trash the Constitution and give the Congress the Middle Finger. We can’t allow the Government to be the enemy of the People any longer.
The Congress also needs streamlined Antitrust and Monopoly control powers. The FED must be abolished, and replaced with a proper National Bank capable of providing ZERO inflation. In America, Cash should never be Trash, so people can save for their Retirement and not be dependent on Government.