Stock prices and the mean expected NGDP growth rate rose yet again last week, making 5 straight weeks of net positive real shocks. Characteristically, inflation expectations and commodity prices declined. But, is the economy weaker than it seems?
The answer is yes, if you place weight on NGDI, or Net Gross Domestic Income, as an alternative to NGDP. These two measures should be equal, since they’re simply two ways of measuring output, and they normally track pretty closely. However, there’s been a significant and growing divergence over the past year.
Thus, if one accepts NGDI over NGDP, the US has already been in a mild recession for several months. Note that the blue line, NGDI, is slightly negative.
What to make of this discrepancy? Jason Furman likes to average the two figures, which results in an economy that is neither in recession, nor running hot.
He also points out that the Philadelphia Fed has its own approach to reconciling the numbers.
I’m inclined to agree most with the Philadelphia Fed’s approach. The NGDI figures are more consistent with falling employment and forward-looking indicators such as the inflation breakevens, and the S&P 500 versus trend.
I was already suspicious of the NGDP figures, as stated previously, due to recent history of rather large revisions and the occasional odd print. This was particularly true of the latest GDP figure released last week, which had real GDP growth revised upward at 5.2%.
So, especially in this period of sharp divergence between what should be equivalent government measures of output, I’ll trust the forward market indicators and the unemployment rate.
This obviously means the US economy is likely closer to recession than many may think, and certainly seems to increase the odds for a mild recession next year. I say “mild”, because the S&P 500 is roughly on trend, and the inflation breakevens are still relatively healthy, if a bit low.
That said, according to the Fed Funds yield curve, there seems to be a sharper expected slowdown next year than in the prior several weeks.
Taken together, I’m a bit more pessismistic about next year than I was last week. However, I’m more optimistic about the future beyond, given the continued positive shocks in the rate of healing of the real economy, along with the continued potential for a productivity boom. Yes, the economy may still be running a bit hot, though it’s not in terms of inflation. But as I pointed out last week, this can be a good situation for stocks for an extended period, as inflation targeting regimes allow economies to run hot in terms of NGDP growth, as long as inflation remains tame.
Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.
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