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GDP goes negative as inflation takes its toll


Last updated on June 1st, 2022 at 03:41 pm

Speaker 1: (00:10)
I’ll tell you, a week in review … a week we don’t really want to review, but we have to. Of course, you saw what happened as the market closed on Friday afternoon … just a whole lot of red. It goes back to these conversations that we’ve been having for nearly a year on the show about the fact that inflation is going to be a problem. And the federal reserve is going to be behind the eight ball. That of course is exactly where we are and that is coming out in the earnings reports that we’re starting to see. We saw a big fang stocks come out this week and really that kind of led the way for the downturn.

Speaker 2: (00:45)
Well, it did, I guess it really depends on what you want to emphasize. For example, Facebook, which was down to the dumps … down more than 50% year to date actually … reported a soft quarter, but the stock traded up 20% in the aftermarket and continued to firm up throughout the rest of the week. Microsoft also reported a really strong quarter as did apple, although they did guide towards greater expense problems with the Shanghai shutdowns. But on the flip side, Amazon had a miss … one of their weakest quarters they’ve had in years in terms of revenue growth. Netflix, we know about that from last week and then Intel of course gave weak guidance. So it’s really kind of a mixed boat in terms of earnings. But again, the market is trying to anticipate where this economy’s going. And right now there are pressures around the world.

Speaker 1: (01:27)
What’s called price discovery is really what’s happening. They’re trying to find what is a fair value giving all of these existential threats that the markets face right now. And of course, anytime you see the Dow Jones over 3% and the NASDAQ down over 4% in one day, it’s gonna catch a lot of attention. And obviously that is going to be the conversation. What we’re gonna try to do here today is talk you through really what the backdrop is. The economy is really what’s front and center. We saw a GDP report, Derek, that really caught a lot of analysts by surprise,

Speaker 2: (02:00)
Right. In real terms, the GDP in the first quarter shrank 1.4%, whereas where the awareness estimate was for 1% growth. So that was a disappointing number.

Speaker 1: (02:10)
The reason why I wanna jump in and say that Derek is because, you know, obviously this rule of thumb that we’ve all heard is that if you have two back to back quarters of negative GDP, that is kind of a generally accepted definition of a recession. We can talk a little bit more about that, but we saw a negative print. You and I kind of went through that GDP report and thought maybe there might be modifications down the road.

Speaker 2: (02:32)
Well, there might be. The big source of weakness was exports to overseas … essentially the European economy is much weaker. Obviously there are things going on with Russia and Ukraine that are affecting demand. So that was one factor. And the other factor was inventories weren’t rebuilt at as rapid rate as they were in Q4. So that also was a negative input on GDP. The other thing I’d point out too though, is, and when we talk about real GDP, we’re adjusting for inflation. Nominal GDP was actually up six and a half percent in Q1, which is part of the reason why corporate profits are roughly up 10% in the first quarter.

Speaker 1: (03:06)
And that’s the reason why inflation is so insidious. And the reason why we were pounding the table about that something had to be done with inflation. So now we have the demand and supply chain mismatch. And that really means, Derek, that this has to work its way out. One of the ways that works out is with time. Maybe time will bail out the federal reserve, but we’re gonna find out next week when they meet.

Speaker 2: (03:29)
Right. And the expectation is they’re going to hike the rate 50 basis points. Most prognosticators believe they’ll also raise the rate 50 basis points in June. So a hundred basis points of increases. I have mentioned before that the two year note already reflects these increases. And in fact, several more. So the bond market has kind of baked this in it’s the equity investors who I think don’t fully appreciate the potential for a gross slowdown or a gross scare in Q2 and Q3 as we approach the midterm elections.

Speaker 1: (03:57)
The fed has to come up to market rates, right? So this raising those interest rates up to market rates is expected, even though we’re seeing worldwide slowing. Again, the fed is really going to have to try to thread the needle and that’s a difficult job going forward.

Annex Wealth Management

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