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Executive Summary

The current real GDP estimate from the Atlanta Fed’s GDPNow model for first quarter 2022 is 0.6%, which is a 6.4% drop from fourth quarter 2021. During 2020 and 2021 government stimulus money increased household’s disposable personal incomes, which resulted in their spending more, saving more and paying down debt (see second graph). However, now with skyrocketing inflation and an end to stimulus money, consumer debt is on the rise (third graph). With this comes a decrease in sentiment and spending (fourth graph). Combine all of this with the Federal Reserve tightening monetary policy in 2022 by increasing interest rates and ending the bond purchase program, and the environment for slower growth builds. Stack on the geopolitical uncertainty with the Russia/Ukrainian war and rising oil and commodity prices and the case for economic slowdown seems more evident.

Please proceed to The Details.

“Suckers think that you cure greed with money, addiction with substances, expert problems with experts, banking with bankers, economics with economists, and debt crises with debt spending.”
–Nassim Nicholas Taleb

The Details

First quarter 2022 real GDP growth could show the largest quarter-over-quarter percentage drop since the depths of the Great Recession. The stimulus induced surge in GDP growth beginning in the third quarter 2020 and culminating in the fourth quarter 2021 is waning this quarter. Last quarter (Q4 2021) saw annualized real GDP growth (quarter-over-quarter) of about 7%. The current estimate, according to the Atlanta Fed’s GDPNow model, for first quarter 2022 is 0.6%. That represents a 6.4% drop in annualized real GDP growth in one quarter. The last time GDP fell around 6.4% in one quarter was in the fourth quarter of 2008 during the Great Recession.

The tremendous disbursement of funds to citizens in 2020 and 2021 under various government stimulus programs led to a jump in real disposable personal income (DPI) (blue line below) which in-turn led to a rise in the personal savings rate (red line below). As the stimulus programs came to an end, the rate of growth in DPI fell. Recently, DPI growth has turned negative, meaning people have less DPI. With DPI falling, the personal savings rate also plummeted. At 6.4%, the personal savings rate is the lowest it has been since December 2013. Now add into the mix, skyrocketing inflation (green line in graph below).

Most households tend to live paycheck-to-paycheck. When stimulus funds dry up, disposable income falls, and the prices of goods and services increase, how do consumers make ends meet? The answer is they turn to credit cards and short-term borrowing. Consumer revolving debt fell after the start of the pandemic as balances were either written-off as losses or balances were paid-down using the massive amount of stimulus funds received. With the free money gone, debt balances are on the rise again as can be seen in the graph below.

Current geo-political events are also weighing on our economic growth. As significant producers of oil and other commodities, the war between Russia and Ukraine is putting substantial upward pressure on the prices of various commodities. In the U.S., the national average price of a gallon of gasoline has risen to $3.60. Consumers, already suffering from rising prices due to the tremendous increase in the money supply combined with supply chain issues, now face the possibility of huge increases in energy and commodity costs.

Consumption is the largest driver, approximately 70%, of the U.S. economy. Consumers are now seeing incomes drop and prices skyrocket. As they turn to credit cards and debt to fill the gap, expect spending to fall as prices continue to rise.

The impact will be further downward pressure on GDP growth. It is now possible the U.S. falls into recession some time this year. Additionally, the stock market is experiencing extremely high volatility and is down year-to-date. If mortgage interest rates rise much further, it will begin to have a visible impact on home sales. With both stock and home prices in major bubbles, a shift in sentiment could result in a serious drop in prices. Consumer sentiment, as shown below, is already down to levels typically witnessed during recessions.

In response to the high inflation, the Fed has indicated they will likely raise short-term interest rates at least three times this year. Many are predicting more than three rate hikes this year. Much depends upon the fallout from the current Russian/Ukrainian war. Higher short-term interest rates will impact many variable-rate loans. This will exert further pressure on the consumer.

Therefore, all indications are that consumer spending will slow during the year. The result could be a recession. The depth and length of the recession depend upon many factors including geo-political events, as well as the reactions from the Fed and the Federal government. The problem is that historically, the answer to all slowdowns has been to loosen monetary and fiscal policy. However, any such actions could feed inflation making the situation worse. We will have to wait and see how our policymakers respond to a likely economic slowdown.

The S&P 500 Index closed at 4,385 up 0.8% for the week. The yield on the 10-year Treasury Note rose to 1.98%. Oil prices remained at $92 per barrel, and the national average price of gasoline according to AAA increased to $3.60 per gallon.


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© 2022. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.

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