This article was originally published at the Humble Dollar
The latest estimates for first-quarter GDP growth was issued by the Bureau of Economic Analysis (BEA) on Wednesday morning. While not market-moving news, it revealed that the economy shrank at an annualized rate of 1.6%, a tad worse than market expectations. The most surprising part of the revised estimate was the downward adjustment in personal consumption. Along with recent credit- and debit-card spending data, as well as comments from a few consumer goods companies, there are clear signs that the economy might already be in a recession.
The Friday before a long holiday weekend is usually quiet for the markets. But instead, we got another GDP data point, this time from the Federal Reserve Bank of Atlanta. Its GDPNow model provides a “nowcast” estimate of GDP before the BEA’s release. The model currently shows -2.1% for the second quarter. To be sure, GDPNow isn’t always accurate. Still, if the BEA’s official number comes even close to that -2.1%, that would imply that the economy has been in a recession since the start of 2022.
A recession, as defined by the National Bureau of Economic Research, “involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The pandemic-induced recession of 2020 is such an example. It lasted just two months. Meanwhile, many economists expect sluggish economic output through 2024. So much for the “roaring ’20s.”
Is your heart beating a little faster having digested those grim thoughts? Here’s the good news: The stock market is not the economy. A rule of thumb is that stocks lead the economy by about six months. Funnily enough, the S&P 500 peaked almost exactly six months ago. The S&P 500’s Jan. 3 all-time closing high of 4,796.56 took place when few traders were anticipating an economic contraction. But by the middle of June, signs of a slowdown were piling up—and stocks had plunged 24%.
Major changes in the stock market’s direction often happen before inflections in GDP and other backward-looking economic data. Expect more troubling financial news not just about the macro picture, but also from the coming corporate earnings season, with executives seeking to lower the bar for the rest of the year. What might fool many investors: We could see a stock market rally in the face of all this negative news.