Name: The GDP Report Tells Us a Lot About Inflation, the Fed and the Odds of Recession
Uploaded: 2023-10-26T15:00:00Z
Duration: 17 min 11 s
Description: WSJ’s Dion Rabouin unpacks the latest GDP report and explains what it says about the state of the economy. Photo: Li Jianguo/Zuma Press

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WSJ’s Dion Rabouin unpacks the latest GDP report and explains what it says about the state of the economy. Photo: Li Jianguo/Zuma Press

https://m.wsj.net/video/20231026/292e9830-07b9-47db-a0ad-f771d63510f9/1/hls/manifest-hd-wifi.m3u8

The GDP Report Tells Us a Lot About Inflation, the Fed and the Odds of Recession

Welcome, welcome, welcome into another exciting edition of Market Takes. And if you know what, if you enjoy economic growth, if you enjoy consumer spending, well you know what? Today is a beautiful day. It's a great day for you. We are talking about today's third quarter GDP report, US Gross Domestic Product. It's an exciting day, a big report, better than expected actually and the expectations were pretty high. So we're gonna break down all of that for you today right here on Market Takes. We're gonna talk about of course, what the headline numbers were in the report and how they compared to expectations. We're gonna take a look at the market reaction. We've seen some, a pretty significant reaction to markets and it's not maybe what you might expect. So we're gonna get into all that in just a minute. We're gonna talk about how this GDP number we got today fits in with some of the other data we've seen for the third quarter and how that could affect things moving forward. And we're gonna talk about what this GDP report tells us about the future because you know, here on Market Takes, we are always looking forward even though it is backward looking data. Last thing, of course, we're gonna talk about what to watch for next. Couple big things coming out next week that you wanna be here for and we'll be right here on Market Takes, so we'll talk you through that. So first things first, what the GDP report showed, let's throw a chart up here on your screen right now, show you what GDP was. This is a reading and this is what we've seen over the past 10 years. I wanna throw the past 10 years up there so you can see where we are compared to the trend. Now we'll point out that those 2020 numbers, we've cut this off at 20%. So if you remember back in 2020 we had a decline in GDP that was about 30% and then we had an increase in GDP that was over 30%. So we're not seeing those because we're cutting this off at 20 to give you a better idea of the scale. But if you look at this latest report, what you see on your screen to the far right is that third quarter number just jumping up and spiking and really reversing the trend. The trend had been for the last few quarters. Remember these are quarters, these are three month periods. You had seen those numbers moving negative and if you remember in 2022, we got those back-to-back negative quarters. You're seeing those there. But then GDP got positive compared to those negative quarters and then we were moving lower. It looked like we were moving towards 0%. You remember the Fed even predicted GDP would be right around 0% for 2023. Well, this quarter reversed all that and just kind of sent things into reverse. And you see it was the highest reading that we've had on this GDP number since the fourth quarter of 2021. You see that big jump there. If you remember 2021, economic growth was just booming. You were seeing that was high numbers. If you compare that to the numbers pre 2020, as in pre pandemic, you see those numbers there, right around that 2%. This is what they call the trend growth number. And economic growth was right around there, right around two, maybe a little higher, maybe a little lower. But we saw in 2021 economic growth really just pick up. You saw that trend kind of reversed and then it looked like in 2023, we were gonna start getting lower and lower and lower, and then this justifies that trend. So really this report right here in this chart, illustrating the way that GDP has moved and the way that this third quarter number really defied the trend that we had seen coming into this report for about the past year. You had seen those numbers moving lower. So GDP was expected to be 4.7%. So we were slightly better than expected, a little stronger, a little closer to that 5% number. And hey, you can round up pretty easily 4.9 to 5%. It is worth noting that consumer spending roses an annual rate of 4%. That's really what's driving this GDP number is consumer spending. Consumer spending increased in the second quarter at 0.8%. So 0.8 to 4%, that's an increase of fivefold. That is a huge increase from one quarter to the next. And that's really what's driving this. It really is all of us going out spending our money. A lot of that we know if you've been watching Market Takes, a lot of that's been credit card spending. A lot of that's been debt spending or debt fueled and finance spending. A lot of folks are still borrowing even though those interest rates are high. If you have a credit card, you're paying the highest rate ever to carry a balance. So keep in mind, that's what's driving a lot of this growth. Let's talk really quickly about current dollar GDP, AKA nominal GDP. 'cause those numbers, even more impressive. 8.5%, 8.5% on the nominal number, that's huge at an annual rate. The economy grew $560.5 billion in the third quarter to a level of $27.62 trillion. That means our economy is growing at a rate around, you could round it up to 28 trillion. That is big. In the second quarter, GDP only increased 3.8%. So again, more than double the increase from the previous quarter, $249.4 billion. All just big blowout numbers. That's the big takeaway that you can come away with from this report. Headline PCE, so that's inflation. We look at quarter over quarter inflation, that surprise to the upside, 3.5%. So PCE inflation, the Fed's favored metric for inflation, the thing that the federal Reserve looks to when they're making their decisions about what they're gonna do, that was higher than expected, three point half percent versus 2.7. So a big beat and inflation rising much faster than expected in the third quarter, and it was only 2.4% previously. This is a big, big increase on the GDP or on the PCE front, excuse me, when it comes to inflation and 1.7% in the previous quarter. So you're seeing an acceleration of inflation that we have talked about here on Market Takes. Those other media sources that you're watching, they haven't talked much about the rise in inflation because they've been focused on core inflation because the Fed's been talking about core inflation. But here on Market Takes, we're independent thinkers, right? We look at what the data says, not what we want it to say. And really what the data has been showing is a consistent pickup in overall inflation. Inflation is worth looking at from the core perspective which strips out food and energy. If you just wanna talk about, oh, well, here's where we think the real pace of inflation is. That's the Feds talked about. But when it comes to what we're all paying, what consumers are actually paying, what's happening with actual prices. That's headline PCE, headline inflation. And that has been moving consistently to the upside, surprise to the upside in this report. That's big. So the core PCE figures, those actually came in below expectations, 2.4% on core versus 2.5% expected and 3.7% in the quarter. So a big decrease when it comes to core inflation but an increase when it comes to overall inflation. What does that tell you? Will, it tells you that food and energy prices are rising significantly and doing a lot of work, keeping prices elevated. The big takeaway from that is what does core mean versus headline? Really what it means is if energy prices and food prices continue to rise, that's gonna continue to elevate overall inflation and keep inflation high. So it won't really matter what happens with core. If those food and energy prices stay high. The Fed likes to look at core because those prices can be volatile, they can jump one month, fall the next, but they have consistently been staying high. Food prices especially have held high and held at higher levels. Energy prices were starting to compare to a lower period of energy prices from a year before and so that's why you're seeing some of that come down. But still, energy prices are accelerating consistently month over month. So you're gonna wanna watch that. The Fed's gonna wanna watch that and that's gonna tell us a lot about what's gonna happen next with the economy. Speaking of what happens next with the economy, let's talk about what's going on in the markets and let's take a look right now. I wanna throw up on your screen what we're seeing on wsj.com in terms of what's happening in the market. Really, we have seen an acceleration downward in terms of the market. You see there, the S & P 500, we're moving down, down, down. Stocks opened a little bit negative, but they have just moved consistently negative and the NASDAQ has been even worse. You see that consistent lower trend and the Dow which had pop positive has now moved consistently and solidly negative. We've seen a couple other reports, but really the pop on this report, the takeaway was, okay, this is higher than expected, growing faster than expected. Let's talk about bonds. If you watch Market Takes, you know it's all about bonds and we are seeing a consistent move down, a solid move down across the board in terms of bond yields going down. You know, when bond yields fall, that means prices rise. So what are folks doing? They're buying bonds, buying safety, buying that government debt. And we're seeing a solid, consistent move lower, especially on the longer end here, right around this 10 year note, you see the 10 year, the seven year, but the biggest move is right here in what they call the belly, the three, five, and seven years. These moves moving in terms of not really what the Fed's gonna do although you do see a seven basis point move in the two year yield. So that's more tied to what they think the Fed's gonna do, what investors believe the Federal Reserve will do, then really these expectations for overall growth. That's moving lower as well. Folks thinking, okay, maybe we overshot, maybe we thought that, you know, bond yields have risen too high so let's go ahead and buy some government debt. Let's buy some of that ultra safe asset. And you see those yield moving lower. Currencies, you got ECB President, Christine Lagarde talking right now. You're seeing the Euro move lower on some of her comments. I think that's really what explains that. One thing I do want to talk about really briefly is this move in cryptocurrency. We are seeing Bitcoin down just a little bit, but look at that price. Bitcoin lasts over 34,000. That is a big move up. Ethereum up over 1800. Crypto has moved up in a big way. You check this year to date number, boom, look at what's happened just over the past week in terms of Bitcoin. You seeing a similar phenomenon in terms of Ether. That's a big move in the crypto market. Last but not least, talk a little bit of commodities. You're seeing oil prices fall, we're seeing oil prices well below that $90 level, that's a big move in terms of oil, coming down, staying below and holding below $90. Also, we saw gold pop above $2,000 per ounce earlier today. Gold has moved back away from that since then. So early this morning you saw gold above $2,000 for the first time in a while. We've moved away from that. And really this market reaction just illustrating the market's thinking in terms of growth in terms of inflation and in terms of those recession odds that we had been talking about. Really, a recession for 2023 is basically out the window right now. It'd be really difficult for the National Bureau of Economic Research to come in and declare a recession for 2023. So it's all about 2024 and what we're looking for there. Let's talk a a little bit about the details within the report. I think the most interesting thing about the report was just a wide range of growth. Remember, consumer spending drove this, but it's all about where consumers were spending and consumers were spending everywhere. There were expectations that the big increase would be oil and gas prices, but that's not what we're seeing in the data. We are seeing a wide range of consumer spending coming from everywhere. I wanna read you something real quick from the report. The increase in real GDP quote, "Reflected increases in consumer spending, private inventory investment, exports, state and local government spending, federal government spending, and residential fixed investment that were partly, partly offset by a decrease in non-residential, fixed investment," blah, blah, blah. Imports, which are a subtraction in the calculation of GDP also increase. So we imported more. Folks were just buying, buying, buying, and really as a country, we were exporting more as well. One thing I wanna talk about is disposable personal income, that increased by about 1.9%, so 2% in the third quarter, compared to an increase of 6.1% in the second quarter. So disposable personal income, as in what folks can spend on whatever they like after their bills are paid, after the credit cards paid, after all the things that they have to pay for have been purchased and the money's been spent. What's that disposable income? How much they have. And we've talked right here on Market Takes about how real wages have been coming down. We've talked about how inflation adjusted wages, when I say real, I mean when adjusted for inflation. Those have been coming down consistently by one Federal Reserve measure, real wages, excuse me, inflation adjusted wages have been coming down for six straight months. So personal income or personal disposable income, real disposable income, sorry, disposable personal income down 1.9% in the third quarter. Real disposable personal income down by 1%, so negative. So we saw an increase of 2% compared to an increase of 6% in the second quarter. And then when it comes to real disposable income, as an inflation adjusted, that was down 1%. So we've seen wages falling when adjusted for inflation. We're now seeing disposable personal income declining when you compare it with the rate of inflation. Personal savings, the personal savings rate was 3.8% in the third quarter compared to 5.2% in the second quarter. People are saving less, they're spending more. They have less money to spend. Their wages adjusted for inflation are lower. These are all things to watch out for when it comes to what comes next for the economy. How this GDP fits with other data we saw in the third quarter, well, let's talk really quickly about retail sales. Let's throw a chart up here on your screen so you can see just what we're talking about. What you see there is a consistent clear trend, right? Growth and retail sales growth moving lower, falling from those high levels of 2022 as we get into 2023. And then what do you see in the third quarter? July, August September, those three reports showing retail sales increase. That just illustrating, again, reinforcing this theme that we had seen. The third quarter was an anomaly, was a reversal of the trend. We see the same thing when we look at the jobs report. Let's throw the jobs report chart up there on your screen so you can check that out. What do you see there? Boom. On the right side of your screen, July, August, September. We've now got all those reports in showing a re-acceleration and a reversal of the long-term trend. And again, this just illustrating what we saw from this GDP report, and that's in a number of different pieces of data. The third quarter, everything picked up, consumers went out and spent, spent, spent. And there are worries that that obviously isn't going to hold. I wanna read you a quick quote from my girl, Quincy Krosby, Chief Global strategist for LPL Financial. Quote, she says, "The Fed's job isn't done and it does not appear that higher interest rates are doing the job for them." Keep that in mind. My man, Greg Daco, EY-Parthenon Chief Economist says, "While these signs of economic of economic strength will fuel speculations that the economy is reaccelerating, we do not expect such strong momentum will be sustained." So keep that in mind. Again, keep in mind the overall trend of consumers spending a lot more than they have, using credit to buy things. That really is what we see going on in the economy. What we see for this third quarter and why economists are saying, we don't think this is gonna last. We don't think this big reversal of the trend that we had seen is going to continue into the fourth quarter and into 2024. So what does this report tell us? Well, let's talk about what it tells the Federal Reserve. It says that growth remains strong and it's time to lock in and watch food and energy prices because if those stay elevated, it doesn't matter what core inflation does. All that matters is what happens with overall inflation. What's actually happening with prices. The Fed is gonna wanna watch food and energy. What does report tell Investors? It says that consumers were strong July through September, but the holiday season will be very important. If consumers are tapped out, if they spend all their money in Q three and there's not more for Q four, there's a lot of businesses here in the US economy that are very dependent on holiday shopping to survive. So if they've tapped out and they're not gonna be able to spend in Q four, that's something to definitely watch out for. Investors are gonna wanna watch out for that. What does this tell everyday people? It says that prices could start to rise again. We know that when companies see people willing to spend and willingly spending, they raise prices and that can create a cycle of inflation where inflation starts to pick back up again. Also, if oil prices stay high, that could push prices up as well because we know that oil prices factor into everything. Anything you get is delivered by some vehicle that runs on oil. The Fed's gonna wanna watch that as well. Last but not least, what comes next? Well, we get the University of Michigan Consumer Sentiment Index. That's tomorrow, on Friday. You're gonna wanna watch that. That has been coming down. Consumers are not feeling good. I think it has a lot to do with those inflation adjusted wages and inflation adjusted disposable income numbers that we talked about in this GDP report. We'll wanna watch that. On Monday, we'll be right here on Market Takes doing a look ahead to all the big numbers that we are going to get the following week. Next week is a big week. We get, not just the jobs report, that's the big one, but we will get the employment cost index, we'll get the JOLTS report. We have the Challenger Job Cuts report. We are gonna get the housing cost index. There is a ton of data out next week, that is gonna move the markets. We'll tell you all about it right here, Market Takes, Monday morning at 10:00 AM. And four more, be sure to check out my podcast, WSJ's Take On the Week. Don't miss it. Sunday morning, 6:00 AM it drops. be there or be a, that's a square. Don't do it. We cut through the noise to explain the major business and financial news that may move markets, all so you can make smarter investing decisions. Subscribe wherever you get your podcast. I'm Dion Rabouin, reporter for the Wall Street Journal. That's gonna do it for us here on Market Takes. We hope you'll be with us Monday morning, 10:00 AM Eastern. We'll see you there next time.