by Gary Alexander
April 30, 2024
At the beginning of this month (in “Is the U.S. Economy Really Growing at 3.4%?” Growth Mail, April 2, 2024), I made the case that the economy was slowing down. In coming to that conclusion, I consulted the little-followed, seldom-reported (quarterly) Gross Output (GO) statistic, a relatively new (since 2014) expansion of Gross Domestic Product. “GO” is rising noticeably slower than the GDP, and it serves as an advance indicator of a slowdown. Whenever “GO” under-performs GDP, history shows that a slowdown (and sometimes an outright recession) is in the cards, so I predicted a slowdown in 2024 GDP growth.
Last week, the first estimate of first-quarter GDP was scheduled to be released on Thursday, April 25. Going into that event, the economic community was giddy. On April 23rd, the Atlanta Federal Reserve’s GDPNow model predicted 2.9% annualized growth, but they had second thoughts on April 24, reducing their forecast to 2.7% that day. On Larry Kudlow’s daily economics program on Fox Business that same day, the former chairman of President Trump’s Council of Economic Advisors, Kevin Hassett, said that he expected a huge 3.5% first-quarter GDP growth rate – and he is obviously no cheerleader for Biden.
Come 8:30 am on the 25th, the GDP estimate came in at less than half of Hassett’s high-end forecast, just 1.6%, the slowest pace in nearly two years. The chief culprits were slower consumer spending and a widening trade deficit, crippled further by an unexpected acceleration in inflation in the last three months.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We also learned that the Fed’s favorite inflation indicator grew at a 3.1% annual rate after rising at a 1.9% pace in the October-December quarter. Excluding food and energy, the core rate came in even higher, at a 3.7% rate, the fastest rise in nearly a year and almost double the 2.0% pace in the second half of 2023.
That sudden quarterly 3.7% rise is reflected in the last blue bar on the far right of this Yardeni chart:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
In retrospect, this chart shows that the Federal Reserve reached its desired 2% target in the core PCE index for two consecutive quarters in late 2023, but that target rate was then violated by a sudden rise in early 2024. The cause wasn’t so much energy prices as a range of increases, from insurance to housing.
Deficit Increases (and High Interest Rates) Will Soon Ring Alarm Bells
In addition to price inflation, deficits and debt are soaring in unsustainable fashion, while high interest rates (for a longer time) are keeping debt service and mortgage rates high. While most deficits are out of the control of Congress (as entitlements), President Biden is going around the nation trying to buy votes by promising more entitlements in the form of college debt forgiveness or a solar energy for all program.
This may seem great to those with huge forgiven debts or free solar panels, but one of these days, a bond auction will be so poorly received that bond yields will soar to levels that may threaten the Treasury credit rating, cripple the economy, send the deficit soaring, fuel a recession and send families deeper into debt.
There is no free lunch. During the 12 months ending March 31, the federal budget deficit grew by $1.66 trillion, but the Treasury actual had to borrow a lot more – $2.6 trillion – in this period, partly to replenish its depleted cash balance at the Fed. The biggest concern now is the cost of new debt service at higher interest rates, pushing debt costs from just over $300 billion to a record $787 billion in the last 12 months.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
All this deficit spending is happening during relatively good times. What happens during a recession?
As Mark Skousen wrote in The Wall Street Journal (“Slow GO May Mean a Recession Soon: GDP numbers look great, but a leading indicator signals trouble ahead,” April 4, 2024), we may be near a recession: “My research shows that gross output—especially business-to-business spending—is a leading barometer of economic health. The metric can make a big difference in assessing the economy’s performance, as was the case in 2022. Real GDP declined in the first two quarters of that year, suggesting a recession. But real GO continued to increase, and there was no recession” (see the chart, below):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
“The situation has since flipped,” Skousen wrote. “Real gross output was a full percentage point below GDP in the fourth quarter of 2023, at 2.4%. While consumer and government spending remained strong, business spending fell 0.3% and has been in steady decline since the third quarter of 2022. In last year’s final two quarters, real GO grew more slowly than GDP. That spells danger. Whenever gross output grows at a slower pace than GDP, it suggests a slowdown and perhaps a recession.”
Business spending represents almost two-thirds of the economy. Business-to-business spending is also more volatile: It tends to decline faster during a recession and recover faster during an expansion.
That’s why we have used Gross Output as an essential leading indicator for growth. When it declines, or grows noticeably slower than GDP, a slowdown is likely, and that is why “GO” looks “SLOW” for 2024.
All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Perils of Owning the Wrong Tech Stocks
Income Mail by Bryan Perry
Three Percent Inflation Looks Like “The New Normal”
Growth Mail by Gary Alexander
Slower GDP Growth Surprised Analysts (But Not Us)
Global Mail by Ivan Martchev
The Case of the Disappearing Rate Cuts
Sector Spotlight by Jason Bodner
Selling is a Bull Market’s “Pressure Release Valve”
View Full Archive
Read Past Issues Here
About The Author
Gary Alexander
SENIOR EDITOR
Gary Alexander has been Senior Writer at Navellier since 2009. He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks. For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.
Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s. He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division. Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander
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