65 Years of GDP History Reveals the Truth About Today's Report

Third quarter U.S. GDP was another good one for the books, boosted a ton by consumer spending and Uncle Sam buying a ton of missiles. Soft landing assured, right? Except, no. GDP doesn't tell you what everyone seems to think it does. In fact, in every single recession going back through the entire post-war period, GDP looked better than it does right now. Yes, better. And in both nominal and real terms, too. The numbers are all conclusive on this. There is no wiggle room on this point. GDP doesn't tell you anything about tomorrow. We all assume, incorrectly, that if what has happened leading up to now appears good in GDP terms, it will continue to be that way forever onward. That's the mistake, especially when GDP is loaded with artificial factors, including how in the latest quarter U.S. defense spending added an enormous half a percentage point to the headline. It was the most DOD expenditures by a lot in over three years. GDP is all about looking backward, not forward. That's what's so misleading. Right at the beginning of every single modern recession, as I said, it looked like it does right now. The numbers are all very similar. In fact, they're eerily similar. Q3 2024 is actually less in GDP than almost every other recession case. And at the start of most cycles, by quite a lot. So GDP's use is only in helping confirm what just happened. It tells us little about what will happen, especially when so much government spending on the most inefficient and unproductive outlet is such a big part of what the economy just did. The only real solid takeaway is that the consumer prices everyone thought were dangerously sticky just a couple quarters ago have all but vanished in the latest one. And the real challenge is to figure out why that is and how that fits into where the economy is actually going. So while GDP is looking backwards, it doesn't necessarily tell us about what's actually coming. It's basically just an accounting for how much has been output in various sectors to the economy. It doesn't tell us if there's enough growth to keep it all going. It doesn't say where that output is coming from, how it is spread around from, say, companies to workers. If consumers are spending, is that getting recycled into the labor market? Are businesses hiring based on the level of output? We used to have a concept of stall speed, which was allegedly around two percent, which was never really established. But the idea was that everyone knew, even if GDP was positive, it didn't necessarily assure you in the way that it's taken to. You can have what looks to be solid economic growth through gross domestic product and have an economy that is in very serious trouble, as we see in other statistics, especially those related to the labor market. And it may just not be enough, given the circumstances, to keep up with job growth and income growth, which is sounding very familiar to the problem that we have now, especially as we get more and more danger signs from businesses and the labor market. While consumers are still spending, that spending is not producing job growth. So output looks okay today, but output tomorrow is threatened by how output is being circulated, or in this case, how it's not being circulated. And that's the common theme that we see throughout business cycle turns. GDP looks good, but when you look under the surface at all the rest of the stuff surrounding it, it isn't behaving, the economy isn't behaving in the way that leads to sustainable success. And that's, again, the big mistake that everyone makes. If GDP looks great now, and it's looked great for the last couple quarters, as we see, it sounds like it should mean that everything will continue to be great, but it often leads to a false impression. So let's take a look at where GDP is as of the advanced estimates for the third quarter of 2024, the numbers that just came out from the Bureau of Economic Analysis. The headline rate was 2.78%, and that's in real terms adjusted for prices, which was a touch below both expectations, as well as last quarter. But in truth, none of those actually matter. GDP was basically the same in the third quarter as it was in the second quarter, with one slight difference. Nominal GDP grew at 4.67% quarter over quarter, that's an annual rate, which was the slowest since the second quarter of 2023, and it was a full percentage point slower than the second quarter of 2024. So that's the problem that we keep coming back to, that you don't see thrown around in all of the media commentary about the headline, is that the nominal economy continues to slow, and while that sounds like a good thing because it means less quote-unquote inflation, it's actually producing more and more problems that we're seeing in the labor market and other places. So the nominal economy is slowing, and keep that mind as we go through our historical review, so you can see exactly what we're talking about here. The biggest driver of GDP was personal consumption expenditures, and as I said, you know, consumer confidence had fallen off many months ago. Consumer confidence isn't really tied to consumer spending. It's about what we're talking about, and what we're constantly talking about, forward-looking perceptions about where the labor market will be. So even though consumers are spending right now, they're growing increasingly concerned about what the labor market will look like down the road, and therefore down the road, spending will shift. In fact, personal consumption expenditures was accelerated to a 3.67% quarter over quarter annual rate. That was the best since the first quarter of 2023. In personal consumption expenditures, it contributed nearly two and a half points of the 2.8% overall growth rate. It was split evenly between goods and services, and basically household consumption continues to stay, household services consumption continues to move along at a steady rate. There was really no contribution from investment, which is a red flag. Not a huge one, but a red flag. Net exports subtracted because there was a bump in imports, which is not a good thing for the economy, especially the foreign economy moving forward, because inventories have been piling up, and imports were rising for reasons that had nothing to do with economic growth. It was more about Red Sea over ordering, potential port strike disruption, things like that. But here's another big one, another artificial one that's not one that you want to see as a support for future growth. Government spending and government outlays contributed 0.85 to the 2.8% headline rate, and 0.6 of that was from the federal government, and of that, national defense contributed half a percentage point to the headline growth rate in the third quarter of this year. And that's the highest from both the federal government overall and national quote-unquote defense since the first quarter of 2021. So a huge, huge contribution, and unusually high contribution, make of that what you will, from national defense. As far as consumer prices go, the overall deflator rose at a one and a half percent annual rate. That's quarter over quarter in the third quarter, which as you'll note, that's below the Federal Reserve's target. That's down substantially from the two and a half percent annual rate in the second quarter, which had been 3.4% back in the first quarter when everyone was panicking about sticky consumer prices. Even the core deflator, that one rose at a 2.2% annual rate in the third quarter, down from 2.8% in the second, and it had been 3.7% back in the first. There is a bigger threat from undershooting consumer prices than from restarted, reignited inflation. So the big question to figure out is why that is. Does GDP tell us, the combined deflator as well as the headline growth rate, does it tell us that the U.S. is heading for that Goldilocks zone and soft landing, or do we look at falling consumer price rates and the slowing down nominal terms and think, it looks great now and it has looked great for the last couple quarters, but underneath all of it, we're moving too much too far into the danger zone and maybe even past the danger zone. That's why unemployment continues to rise and now we're seeing layoffs because though output appears to be robust, it always looks robust just before the recession starts. Again, GDP doesn't tell you what the economy is going to do next quarter, it only tells you what happened this previous quarter. We make that assumption that if it looks robust today, it will have to keep humming along well into the future. And again, that's a false assumption and history has shown that repeatedly. The best and most obvious single-quarter example is the third quarter of 2007, an episode that I pointed to recently, talking about how interest rates always react after Federal Reserve rate cuts. And in the third quarter of 2007, the Bureau of Economic Analysis initially reported their advanced estimate for the third quarter of 2007 GDP was at a 3.9% quarter-over-quarter rate. That's the third quarter of 2007, the last one before the Great Knot recession began, and it was up near 4%. Now it's been revised down significantly since then, but again, on an apples-to-apples basis, they were talking about a 3.9% GDP in the fall of 2007, which is one reason why, combined with a couple of good payroll reports from the Establishment Survey and the Bureau of Labor Statistics, that's why the Fed in late 2007 was talking about a 50 and then a 25 basis point rate cut as the end of the entire cycle. They didn't think they needed to do any more, because GDP looked terrific, payrolls were starting to pick up, and this sounds familiar because it really should. This happens every single time. And to show you what I mean, we'll just do a review of how GDP has behaved before recessions and throughout the post-war history. We'll take a four-quarter average of both nominal and real GDP so that we can smooth out, because oftentimes it's pretty volatile, it moves up and down. So we'll look at a four-quarter average, so you look at the economy and how it was performing leading up to that edge of the cliff falling into recession. And as of the current quarter, the third quarter of 2024, nominal GDP has averaged about 4.9% at an annual rate, and real GDP has averaged about 2.6%. And both of those sound terrific, they sound more than solid. 5% nominal growth and 2.6% real growth, that would appear consistent with an economy that's just humming right along, especially as consumer price rates are coming down toward the end of that period. Sounds like perfect Goldilocks. But if you go back just to start a comparison, let's go back to the fourth quarter of 2019. And we don't know if that would have been a recession or not, but there was a very much a recession scare at the time. The Fed was cutting rates, overseas economies were experiencing recessions, there were serious questions, inverted yield curve, and everything else. The four-quarter average nominal GDP into 2019 was the same 4.9%. And in real terms, it was actually even better. Real GDP averaged 3.3% throughout 2019, despite all of that recession scare, the markets, and everything else. But as far as real recessions, where we actually do get confirmation of the cycle, during the third quarter of 2007, average nominal GDP, so four-quarter average of nominal GDP, was 5%. Almost exactly what we saw in 2019, as well as the current quarter in 2024. Real GDP was only slightly less at 2.3%, which sounded pretty solid. Remember, these are the modern estimates, not the ones that were issued and released at the time. So it looked actually better when the announcements were made, when the data was actually being released in real-time. The dot-com recession, so the four-quarter average to the year 2000, leading up to the dot-com recession. Nominal GDP was again averaging 5.4%, even better than what we have now. Real GDP was averaging 2.9% in those four quarters leading up to the dot-com recession. 2.9%, that's better than the 2.6% that we've averaged over the last four quarters here. 1990, the SNL recession. Up to the second quarter of 1990, the four-quarter average for nominal GDP was 6.2%. There was more consumer price growth at that particular moment in time, but still, nominal GDP looked more than healthy at 6.2%. In fact, it looked inflationary, especially to those at the Federal Reserve and to economists. Real GDP was growing at a 2.4% average up to the second quarter of 1990. Then you start looking further back at the Great Inflation Recessions, which sounds like something that we should be comparing to now, especially since everybody's been talking about sticky consumer prices and inflation risks. So you would think that in nominal terms, GDP today would look similar to the Great Inflation, but it's nowhere near it. You can only do a two-quarter comparison because the 1981-82 recession came so closely after the end of the 1980 recession. But you look at the two-quarter comparison through the first quarter of 1981, nominal GDP was growing, get this, at a 20% rate. That's the two quarters leading into that recession. Nominal GDP is rising at a 20% rate. In real GDP, despite the inflation, despite actual genuine massive amounts of inflation, real GDP grew in those two quarters by an average of 7.6%. So we have massive nominal growth and pretty solid recovery in terms of real GDP, and it didn't matter. What immediately followed from that, the 1981-82 recession, had been the worst post-war recession up until 2007 and 2008, despite the fact that it was 20% nominal growth and nearly 8% real growth leading into it. The short and brief recession before that in 1980, by the first quarter of 1980, nominal GDP was rising at a 10.4% average rate. That's the four quarters leading up to that moment. In real GDP, this is the only one where you look at real GDP and say that's kind of concerning. Real GDP averaged a 1.4% rate of growth in the four quarters up to that point. Before then, 1973, the fourth quarter of 1973, before the big recession in 1974 and 1975, nominal GDP, great inflation, 11.1% average. Even real GDP, despite that inflation, real GDP was averaging nearly 4%, 3.9% in the four quarters heading into that recession, and that's with a negative quarter in the third quarter of 1973. So throughout 1973, real GDP averaged almost 4%, headed into a recession anyway. One more, going back to the start of the Great Inflation, or toward the start of the Great Inflation, the third quarter of 1969, before the 69-70 recession, nominal GDP growing at 8.3%, and real GDP averaging 2.9%. So in every single period just before these recessions, nominal GDP growth is higher than what we see here in the third quarter of 2024. The average rate is above every single time what we have today. And real GDP is higher in all of those except three, and two of those three, 1990-2007, are pretty close to what we see today. So using GDP alone to tell yourself that the economy is just fine, or saying that it's going to be just fine moving forward, that's the mistake. GDP only tells you what has happened, not what will. But it's understandable, and even makes some sense, why you would think that if GDP looks solid beforehand, it's going to continue to be solid all along. Because that's the primary measure that most people turn to when they look at where they think the economy is today. And therefore, where it is today must be where it's going to tomorrow. That's the big mistake. GDP is agnostic about recession questions and cycles. It's only basically an accounting construct to add up what has happened during the quarter. What ultimately decides the question of recession, or the vastly more important one about the long-run trajectory, meaning economic potential, that's not in GDP at all. And all the latest GDP numbers have told us is that the recession processes that everyone recognizes as recession processes didn't get to be recognizable during the third quarter, which we already knew. Even though we see a slowdown in a whole slew of economic accounts, it wasn't as if the economy crashed and fell off a cliff. So we wouldn't expect that GDP would reflect a crash and falling off the cliff. Instead, GDP looked in the third quarter a lot like it had in the second quarter. But here's the thing. GDP always looks fine just before the recession starts. And in fact, looking back through history, it has looked more fine in previous cycles than it does right now. Whatever output might be in GDP right now, it's not enough. We're starting to see layoffs. We see lack of hiring. Talk about the real state of the labor market in the video link below. As always, thank you very much for joining me. Huge thank you, Eurodollar University members and subscribers. And until next time, take care.