Real wages are in the gutter. Real GDP is signalling a recession. Real productivity has gone down. But who takes responsibility for the consequences of ill policies or failure of the expert’s models.
The Atlanta Fed just predicted GDP growth of 2.5% in the 3rd quarter of 2022. This is not based on the CPI number but on July’s jobs report. When I look at the details of this report I can see:
1. Labour output decreased by 2.5% year-over-year. The worst decline since these stats are measured and started in 1948.
2. Labour costs increased by more than 12.6%.
I do not have to be a rocket scientist to know that higher cost for less output is a recipe for disaster. In my opinion, it is foolish to predict a GDP growth of 2.5% and a peaking inflation under this scenario. But that’s me, “Joe Average”, but I am sure our experts come up with something different.
GDP expansion is typically driven by housing and consumer cyclical sales. Again, it is obvious that increasing rates and slumping prices, won’t get us strong houses numbers in the 3rd quarter. With Americans piling up consumer debt like there is no tomorrow it’s hard to see large amounts of consumer buying at higher interest rates either. They will struggle to pay off their existing consumer debts already.
A core CPI of 5.9% is still about 3 times the number than the Fed’s target rate of 2%. It will take years to bring inflation back to a sustainable level. We never had back-to-back core CPI prints over 5% without lifting the Fed Funds rate above CPI levels. But the market refuses to price in this risk. The probability of a rate hike above 4% by next February is less than 2.5%. Imagine what happens to the CPI if oil prices rise again due to supply problems or Chinese demand. Imagine what occurs if China does hit Taiwan or Brazil’s election creates such chaos that its state-owned oil company (Petrobras) stops exporting. There are many unknown factors out there.
Our experts paint a very optimistic picture. The market adopted it. Let’s see what happens, when the obvious arrives and the FED has to take further action.
Sven Franssen