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Executive Summary

By now many have heard first quarter real GDP turned negative by 1.4%. In the second graph one can see net exports had the largest negative impact on GDP. Personal expenditures held steady, however may not do so in the second quarter as real disposable incomes are down 20% (see 3rd graph) compared to this time last year. Personal savings and retail sales are also declining. One of the more alarming pictures is the sixth graph showing slowing growth and rising prices are not isolated to the United States. And do not forget the Fed is just beginning their monetary tightening campaign.

Please proceed to The Details.

“The future has a way of arriving unannounced.”
–George Will

The Details

Last week the BEA (Bureau of Economic Analysis) released the advanced reading of first quarter 2022 real GDP growth. Most experts had settled on an estimate between 1-2%. To the disappointment of all, the BEA announced that real annualized GDP did not grow at all, but instead fell by 1.4% for the quarter. Subsequently, many pundits appeared to jump on board with our call for a likely recession to start this year. The graph below illustrates a 10-year moving average growth rate of only 2.31%. The current 10-year moving average remains over 27% below the long-term average growth rate of 3.18%.

The largest negative change versus fourth quarter results stemmed from a drop in net exports as shown in the chart below from Advisor Perspectives.

While PCE (Personal Consumption Expenditures) held-up quite well in the first quarter, the graph below of real disposable personal income does not portend a similar result in the second quarter. Real disposable personal income has plummeted, down 20% in March 2022 versus the similar period last year.

And as income has dropped and prices remain high, it should come as no surprise that people are dipping into savings to survive. The graph below illustrates the drop in personal savings.

Although the rate of change of “nominal” retail sales remains positive, when adjusted for inflation, real retail sales are falling. In the graph below I subtracted the change in the CPI (Consumer Price Index) from retail sales to estimate a change in inflation-adjusted (real) retail sales. Notice real retail sales have turned negative.

It is important to note the downturn in economic growth is not isolated to the United States. In fact, as seen in the graphs below from the Financial Times, growth is slowing around the globe.

The Atlanta Fed’s GDPNow model for estimated GDP growth for the second quarter 2022 is currently at 1.6% or almost the same as their estimate for the first quarter. In other words, it is highly possible the second quarter real economic growth turns negative confirming the calls of a new recession. And remember this is occurring at the same time the Fed is embarking on a major monetary tightening campaign. Presently, until the flight to safety into Treasury securities occurs, there is potential danger across the board.

The S&P 500 Index closed at 4,132, down 3.3% for the week. The yield on the 10-year Treasury Note fell to 2.89%. Oil prices increased to $105 per barrel, and the national average price of gasoline according to AAA rose to $4.19 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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