US growth hurtles off a cliff

By in US Economy

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The Fed’s GDPNow is hurtling off a cliff:

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2021 is 0.5 percent on October 19, down from 1.2 percent on October 15. After recent releases from the US Census Bureau and the Federal Reserve Board of Governors, the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth decreased from 0.9 percent and 10.6 percent, respectively, to 0.4 percent and 8.4 percent, respectively.

This measure has a good history of leading actual GDP. The US fiscal cliff is coming to bear and it is going to get much worse over the next six months:

The energy bubble is makig it all worse. Goldman:

  • In our commodity strategists’ baseline, US natural gas prices will move downover the next three months from $5.50/mmBtu to $3.65/mmBtu and oil pricesshould move only moderately higher (from $82/bbl to $87/bbl). But if winter isone standard deviation colder than usual, tight energy supplies could cause US natural gas prices to more than double and oil prices to rise an additional 5%.
  • Our analysis suggests that the increase in energy prices to date has boostedcore PCE inflation by about 40bp on a year-on-year basis through Q3, and that if energy prices were to grow in line with our commodity strategists’ forecasts, theimpact on year-on-year core inflation would rise to a peak of 45bp in Q4 beforefalling to 15bp by end-2022. Core PCE inflation would likely only be a few basispoints higher on average through end-2022 in a cold winter scenario, in partbecause natural gas accounts for only 0.2% of the cost of core consumer prices.
  • We estimate that the increase in energy prices under our strategists’ forecastswill be a 0.5pp drag on real consumption growth over the next year and that acolder than average winter would be an additional 0.1pp drag. However,the hitto spending could be smaller than usual because pent-up savings from thepandemic could cushion the blow to consumer spending power

It is true to say that high private savings being run down is a cushion of sorts. But the opposite is also true of the fiscal cliff. The huge deficit is where the high private savings came from. As it corrects it will withraw a lot of growth so those private savings had better be spent or the US is going into recession.  That’s not the base case but I do think that a nasty slowdown is unavoidable.

Stocks are not priced for this as it converges with the virtual Chinese recession.

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