FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 12, 2021

IN THIS ISSUE:

1. US Economy Takes A Dive In August & September

2. Fed’s GDPNOW Indicator Has Plunged Since August

3. Two Bad Monthly Unemployment Reports In A Row

4. Are We Staring At A New Recession? Could Be

5. Fed To Halt Asset Purchases, Raise Rates Next Year

Overview – US Economy Takes A Dive In August & September

We all remember the COVID-19 recession which occurred in early 2020. It was a severe recession which saw GDP plunge over 30% last spring during the widespread lockdowns. The good news was the lockdowns ended quickly and the economy recovered all its losses, and then some, in the 3Q of last year. It’s been on a roll ever since.

The US economy grew by 4.3% (annual rate) in the 4Q of last year, 6.3% in the 1Q of 2021 and 6.7% in the 2Q of this year. The growth since last year’s brief COVID-19 recession has been the strongest in decades. Job creation has been outstanding.

However, as I must report today, there are storm clouds on the horizon. The economy appears to be rolling over to the downside in a hurry based on recent data for late August, September and so far this month. We all knew the economy was likely to weaken in the second half of this year, but the latest data indicates it is contracting much faster than most forecasters expected. In fact, GDP is plunging according to the latest data from the Fed!

Fed’s GDPNOW Indicator Has Plunged Since August

Let’s take a look at the latest forecast from the Federal Reserve Bank of Atlanta, the so-called GDPNOW report, which forecasts the economy in real time. It has deteriorated very badly since late August, as you can see below.

While most mainstream economists still see the economy humming along at 6% or better (blue line below), the researchers at the Atlanta Fed say the economy has rapidly shrunk to an annual rate of only 1.3% today.

Wow! Obviously, that’s an enormous drop-off in such a short period of time, especially since it held just north of 6% most of this year. We haven’t seen a decline of that magnitude that fast since the Great Recession of 2008-09.

As I reported last week, consumer confidence did move somewhat lower in August and September (see below), but not enough to warrant such a severe downturn in the Fed’s economic forecast. The Fed is obviously seeing something in its data that mainstream forecasters are not seeing yet. The question is, what could have caused it? I’ll offer some ideas as we go along today.

Two Bad Monthly Unemployment Reports In A Row

Bullish business leaders, economists and policymakers were banking on a September surge of hiring with the end of extended unemployment benefits, schools reopening and continued vaccinations. But those bets went bust after the latest release of monthly employment figures last week showed another month of lackluster hiring.

The Labor Department reported Friday that the US economy added only 194,000 net new jobs in September. Forecasters had expected the figure to be at least 500,000. The headline unemployment rate did decline 0.4 percentage points to 4.8% – that was the only good news.

"Notable job gains occurred in leisure and hospitality, in professional and business services, in retail trade, and in transportation and warehousing," the Labor Department said last Friday. 

The disappointing unemployment report for September came after the US jobs report for August also came in significantly below expectations.

The Labor Department said last month that only 235,000 jobs were added in August when economists had expected around 720,000. The August new jobs number was revised on Friday from 235,000 initially reported to 366,000. While the upward revision was welcomed, it is still only half of the 720,000 new jobs expected.

Both monthly jobs reports came amid a surge of COVID-19 cases in the United States driven by the more contagious Delta variant. This has made more able-bodied workers reluctant to return to the job force.

We remain in the complex situation where there are 11 million unfilled jobs and 8 million unemployed workers who are not returning to the labor force. Most experts expected September to be the month the labor markets snapped back to near normal in terms of new jobs created – what with the stimulus checks having ended.

But it simply didn’t happen. It remains to be seen what happens next.

Are We Staring At A New Recession? Could Be

Given the dramatic plunge in the economy since late August, we have to consider whether we are headed for a new recession. Just a month ago, I would have said no way. Yet in light of the GDPNOW chart above, we have to consider it is at least a possibility. Again, the question is why.

As I pointed out last week, consumer confidence has rebounded strongly since last summer, although it has dipped in late August and September.

Retail sales, another barometer of consumer spending, have shown a similar pattern over the last year or so, taking a huge hit last summer during the lockdowns but rebounding strongly since then. Most forecasters expect retail sales to remain strong through the end of this year and likely into 2022 as well.

Let’s put our thinking caps on and try to figure out what could have caused the Fed’s economic data to go so negative over the last several weeks. One possibility was the debt ceiling issue and a possible government default in less than two weeks.

Yet Congress moved last week to extend the debt ceiling to December. Perhaps the data the Fed is seeing reflects frustration that Congress didn’t take more permanent action such as ending the debt ceiling altogether. This seems like a stretch, however.

Maybe it’s because President Biden rolled back common-sense regulatory reforms recently which had been instituted by President Donald Trump, making it easier for environmental activists to obstruct and delay any infrastructure projects that receive even a single dime of federal funds. That also seem a bit of a stretch to me.

Fed To Halt Asset Purchases, Raise Rates Next Year

Here’s what I think is influencing the Fed the most all of a sudden. The Fed Open Market Committee (FOMC) met on September 21-22. At that meeting the FOMC decided it may be time soon to halt its monthly purchases of $120 billion in Treasury bonds and mortgage-backed securities. The official policy statement read:

“If progress [in the economy] continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.”

While the policy statement made no mention of raising interest rates anytime soon, the markets have assumed the Fed intends to begin hiking short-term interest rates in 2022, a full year earlier than previously indicated. Let me be clear: the FOMC policy statement said nothing to this effect. It only said asset purchases might be reduced just ahead.

Yet most Fed-watchers believe when the actual meeting minutes are released later this week, they will reveal that the FOMC members did discuss raising interest rates next year if the economy continues to improve. This may or may not be true. We’ll find out later this week.

If there is an explanation for the sharp drop-off in the Fed’s latest GDPNOW indicator, I think this would be the most likely reason. This remains to be seen, of course. It likewise remains to be seen if other forecasters will follow the Fed’s lead and revise their economic forecasts significantly lower as well. Time will tell.

In any event the next few weeks will be a critical time for the markets. We need to keep a close eye on consumer confidence and spending as this accounts for apprx. 70% of GDP. It will also determine whether we are looking at a new recession in the months just ahead.

As always, I’ll keep you posted.

All the best,

Gary D. Halbert

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