Morning Report: The Atlanta Fed’s GDP Now Index sees negative growth in Q2

Vital Statistics:

S&P futures3,777-49.55
Oil (WTI)106.44-1.94
10 year government bond yield 2.82%
30 year fixed rate mortgage 5.66%

Stocks are lower this morning as investors fret about growth going forward. Bonds and MBS are up again.

The big event this week will be the jobs report on Friday. The Street is looking for 270,000 jobs and for unemployment to remain at 3.6%. We will also get the ISM Services Report which will be a bellwether for the state of the economy.

The data last week has pushed the Atlanta Fed’s GDP Now forecast to -2.1%. This would mean negative GDP growth for the first half of 2022.

This would typically mean we are in a recession. That said, the government and the chattering classes are pushing back against that definition. The government changed the definition of a recession from 2 consecutive quarters of negative GDP growth to something more subjective: “In general usage, the word recession connotes a marked slippage in economic activity. While gross domestic product (GDP) is the broadest measure of economic activity, the often-cited identification of a recession with two consecutive quarters of negative GDP growth is not an official designation. The designation of a recession is the province of a committee of experts at the National Bureau of Economic Research (NBER), a private non-profit research organization that focuses on understanding the U.S. economy.” 

What this means is that even if we get a negative GDP print in the second quarter, the government and the business press will insist we are not in a recession. They will use the low unemployment rate as the reason. That said, the National Bureau of Economic Research generally gets around to calling something a recession after it is over.

Regardless of whether the government determines we are in a recession or not, the yield curve is definitely giving clues that we are headed towards one. The slope of the yield curve (i.e. the difference between short term rates and long term rates) is often a pretty solid indicator of an impending recession. Here is a chart of 2s-10s going back to the 1970s:

The shaded lines indicate an official NBER recession. You could make the argument that this indicator has lost value in a QE world, and you would be 100% correct. That said, the indicator is flashing a warning sign for growth.

The problem for the Fed is that interest rates are still highly negative on an inflation-adjusted basis. The Consumer Price index is running over 8% and the PCE Index is running at a 4.7% rate ex-food and energy. So, even though the Fed is being aggressive in hiking rates, overall monetary policy remains highly accommodative.

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