Today's GDP to be Negative?

Macro Perspectives: Thu 28 Oct 21

Following on from my previous note, yields (market interest rates) haven't been going anywhere fast, despite hot inflation data and despite another strong earnings season. Perhaps it's because of this…

The above graphic from the Atlanta Fed, tracks the path of their Q3 GDP estimate. As you can see in the green line, this estimate started at 6% back in August, and has been in steady decline. Today's update projects the Q3 number to be just 0.2%.

What's driving this decline in the Atlanta Fed model?

It's mostly a sharp decline in consumer spending (relative to the first two quarters of 2021). Remember, back in August, we looked at the University of Michigan consumer sentiment survey - it had plunged to 10 year lows. The economist that conducts the survey explained it this way: "The reaction of consumers to rising prices has been to postpone purchases, given their fears of falling future living standards..."

This "postponement of purchases" has created this major slide in economic activity, in an economy that was running at a better than 6% pace through the first two quarters of the year.

Now, with the above in mind, the 10-year yield broke down yesterday, trading to as low as 1.52%.

That's an 11 basis point decline intraday (a big move) and nearly a 20 basis points drop in the world's most important interest rate barometer, in just four trading days. With that signal in the markets, key commodities that have been proxies of growth and inflation, were all knocked down.

What's going on? The government's Bureau of Economic Analysis reports the official Q3 GDP number this morning. Based on market behavior yesterday, this number may be negative.

If it is, expect the chatter to start about potential recession. This would come just as the Fed is expected to take its foot off of the (stimulus) gas next week (beginning-the-end of QE). And this would come just as the administration is clawing for leverage to push through the biggest, boldest fiscal spending plan in the history of the country.