Morning Briefing | This 70-Year-Old Indicator Has a Perfect Recession Record
Google is in the hot seat over alleged antitrust violations – The U.S. Justice Department has accused Google (GOOGL) of paying billions of dollars to device makers, wireless companies, and browser makers to secure a monopoly for its search engine. On the other hand, the tech giant has argued that high quality is to blame for the search engine's popularity. Google also says the U.S. government was wrong to accuse the company of breaking antitrust laws to maintain its dominant position. The trial will determine if Google has violated antitrust laws regarding its paid search advertising management. If found guilty, the company could be forced to change its practices or divest assets. This case has huge implications for the tech industry, as it could shape future antitrust actions against other Big Tech companies.
Major furniture supplier for Amazon announces bankruptcy – Despite boasting big-name clients like Amazon (AMZN), Wayfair (W), and Target (TGT), Noble House Home Furnishings will liquify its assets. Net revenues have been in a three-year tailspin, forcing the furniture company to close its doors. GigaCloud Technology (GCT) has agreed to purchase Noble House's assets for $85 million, along with $4.1 million for equipment and select debts. The combination of declining sales and inflation that contributed to the collapse provides a glimpse of what could happen if consumer spending were to significantly drop.
Core inflation expected to slow – Later this morning, August's Consumer Price Index ("CPI") is expected to reveal a 3.6% increase in inflation compared with the previous year. The headline figure is forecast to rise from last month's 3.2% gain largely due to volatile upward swings in energy and food costs. Core CPI, which excludes food and energy costs, is anticipated to show a 4.3% annual increase, down from the 4.7% reported in July. The Federal Reserve is closely monitoring the trends in core inflation, and a continued decline would likely allow the central bank to maintain its current interest-rate level. However, should there be a notable uptick in core inflation, it could prompt the Fed to consider raising interest rates further.
Household income suffers its sharpest decline since 2010 – U.S. inflation-adjusted household income saw its steepest decline since 2010, falling 2.3% in 2022. According to the U.S. Census Bureau, the median income for 2022 was $74,580, down from $76,330 in 2021. A double whammy of a rising cost of living and the end of pandemic-era financial-aid programs is to blame for the third consecutive annual decline. While the official poverty rate edged slightly lower than the previous year, it remained relatively unchanged. The results highlight the economic challenges faced by American families – and the eerily similar conditions of past recessions like the 2008 global financial crisis and the dot-com bubble.
Failed banks still haunt the U.S., creating a new hurdle – The U.S. government wants to get rid of a $13 billion pileup of mortgage bonds after digging Silicon Valley Bank and Signature Bank out of trouble. BlackRock (BLK) has sold off much of this inherited portfolio but was unable to offload about $12.7 billion of bonds linked to project loans. Backing these bonds are long-term, low-rate loans – mainly for developers constructing affordable apartments – making them increasingly difficult to sell. The Federal Deposit Insurance Corporation ("FDIC") is exploring options like cutting the bond prices or repackaging the debt into new securities. The complexity of these bonds emphasizes how failed banks can create lingering problems for the government... even after new institutions take over.
German investors are more optimistic despite the worsening economy – German investor sentiment improved unexpectedly in September, with the ZEW economic sentiment index rising to negative 11.4 points from negative 12.3 points in August. The surprise increase was partially attributed to respondents anticipating interest rates stabilizing in the U.S. and eurozone. However, investor sentiment toward the current economic situation in Germany continued to worsen, with the indicator falling to negative 79.4 points – its lowest value in three years. This contrast highlights a slight improvement in expectations regarding Germany's economic situation over the next six months.
Back in June, I wrote about the idea that Americans are in a silent recession.
Here we are, nearly three months later, and I am more certain of this than ever.
Why?
Because not only have the media, financial institutions, and the government not declared one, but it seems that they are adamantly trying to convince us we aren't in a recession or headed toward one.
I don't know about you, but to me, when someone is trying so hard to convince me of something, my "B.S. detector" starts going off.
Heck, this is why some of the younger millennials and Gen Zers are now even calling this "the gaslight recession."
For those of you unfamiliar with the term, gaslighting is modern slang for manipulating reality and trying to convince someone that something that is actually happening is just in their head.
In other words, many Americans feel as though they are being lied to purposely about how well things are going right now.
And we've seen this before...
Take a look at some of the headlines from 2007...
Now look at a quick search I did yesterday...
Look, people get predictions wrong all the time. And I am certainly not making the argument that forecasts for a "soft landing" will cause a recession to occur. But there is a correlation nonetheless that's worth pointing out.
Regardless of motive, perspective, or misfortune, human judgment is flawed at its core.
This is why we developed quantitative, nonbiased statistical measures and economic indicators. They are supposed to make our analysis more accurate and objective.
This leads me to a specific economic indicator that I find truly important.
Real gross domestic income ("GDI").
This metric has recently grabbed the attention of our colleagues Corey McLaughlin and Dr. David "Doc" Eifrig.
(You may be familiar with the closely related real GDP, though they are not the same thing.)
Check out this excerpt below from Monday's edition of the Stansberry Digest, "Never Forget and Looking Ahead," in which Corey and Doc explain the differences between the two indicators and highlight a growing disparity we are witnessing.
Specifically, in his latest Retirement Trader advisory, published last Friday, Doc examined one of the most important economic indicators that he and his team watch...
The issue focused on the difference between U.S. gross domestic product ("GDP") and gross domestic income ("GDI"). We've spilled some ink here lately about fluctuating U.S. GDP and expectations for it moving ahead. But GDI is worth looking at, too...
In short, this indicator puts numbers to the economic story we've been telling lately. Life for the everyday American consumer isn't great – even though the "official" data shows the pace of inflation declining and GDP growth accelerating.
As Doc explained in Retirement Trader on Friday...
For every dollar someone spends on a good or a service – such as a movie ticket, a new watch, or a haircut – another individual earns a dollar of income to deliver that good or service. GDP captures the spending side of these transactions. GDI captures the income side.
In a perfect world, GDP and GDI would be the same. But we don't live in a perfect world... There is always some difference because these statistics are measured using different data sets and different sources. But the difference should be minimal, and it typically is.
When we see a large gap between GDP and GDI, it can be a warning sign for the economy. And the gap is large right now...
What should we make of this gap today?
To me, it suggests that since early 2022 – the last time GDP and GDI were tracking together – the amount of income people, on balance, have been making compared with the amount they're spending has drastically declined.
Again, it looks like a U.S. consumer who isn't "resilient." Instead, he seems "resigned" to the current state of the cost of living.
From where I sit, the growing divergence between the two gave me reason to dive even deeper – and what I found was very interesting.
If we look at the 10 quarters where this divergence was the largest, every single occurrence (sans current day) has either been in the year leading into a recession or the year of.
Take a look at the table below...
But I didn't stop there...
I went on to look at the annual percent change in the two... and specifically GDI.
For three consecutive quarters, the annual percent change in GDI has been negative.
Take a look...
As you can see, the last time GDI fell negative was during the onset of the pandemic.
In fact, since 1950, we've seen this figure turn negative 12 times!
And in all 12, the National Bureau of Economic Research declared an official recession (indicated by the gray shaded areas).
Check it out...
But two previous recessions stand out the most to me: 1970 and 2001. I find them particularly interesting because of the GDP.
First let's look at 1970...
You can clearly see that the annual GDP growth barely turned negative, and it only happened for one quarter.
Now let's look at 2001...
Here, the GDP didn't turn negative. In fact, this is the only time in the history of record keeping (since 1948) that it didn't.
But there was still a recession.
If we zoom in on today's chart, we can see that it's very similar to the two above...
So no, this measure of real GDP does not have to turn negative for there to be a recession.
But if real GDI does, watch out. This indicator hasn't failed to predict a recession in the past 70 years.
And I doubt it is going to start now.
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