We like to follow personal consumption, business investment, and home building, combined, which is called our “core” GDP. The problem is that although overall real GDP increased at a 2.6% annual rate in Q3, “core” GDP rose at a meager 0.1% pace. That’s a growth rate in core GDP that we usually see just before, during, or just after recessions. Not good news.
The Economies growth in the third quarter was led by net exports. Don’t expect that to continue. The dollar has strengthened substantially versus other major currencies and so will limit future purchases by foreigners while making foreign goods relatively inexpensive for Americans.
That inexpensive foreign goods opportunity is limited. Moving forward, it’s hard to be optimistic about growth in consumer purchasing power when “real” (inflation-adjusted) earnings are falling and consumers have reduced the extra balances they had in bank accounts due to massive government stimulus checks in 2020-21.
Inflation remains a problem. Nominal GDP (real GDP plus inflation) is up 9.0% from a year ago. This figure signals that the Fed still needs to raise interest rates to bring inflation back down and the rates increases are likely to cause a recession eventually – March or June 2023 is our expectation.
The construction industry already appears to be in a recession of its own already. On an annual basis Home building declined 26.4% and Commercial construction fell 15.4% in Q3, the sixth consecutive quarterly drop for both and the largest decline since COVID first hit the US. Price changes are moving dramatically lower in housing and rent increases are moving dramatically higher. Do not be surprised when your children ask to move back in with you.
We are considering these factors on your behalf daily. As always, call or drop a note if there is anything on your mind we can support or address.