The Dividend Cafe - Economic Truth-Telling in an Age of Narratives

Episode Date: August 5, 2022

One of the hardest things about being an economic commentator in this day and age is that economic commentary requires nuance, and this day and age requires narratives.  There is to be a single narrative about X, and any variation around, above, beneath, or of the exact X narrative is heretical or at least unappreciated. It is a tough way for society to function, but it is an especially tough way to do economic analysis. I do not merely refer to the inevitable complexity involved in topics like these that are, well, complex.  You are smart readers, and I do my very best (sometimes better than others) to make complex topics a bit more comprehensible in my writing and speaking.  Readers and listeners can judge how effective I am there, but I do try.  No, this is not about complexity, but nuance, which basically can be quite simple at times; it is just that it doesn't fit into the script of a narrative.  It isn't binary.  The nuances of proper economic analysis aren't always fit for a forced narrative. Such is the moment we are in, and today I want to answer your questions about the state of the economy.  If I do my job right, everyone will be mad at me when all is said and done (I should fail at landing in either of the primary narratives of the day).  Such is the plight of an economic truth-teller in 2022 ... Jump on into the Dividend Cafe! Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to another Dividend Cafe recording live from my New York apartment where I just arrived about an hour ago and I'm just getting ready to leave for a day of meetings but I got the weekly jobs or excuse me the monthly jobs report just came out moments ago so I'm going to incorporate that into some of the things I'm talking about today and I'm hoping this will be a really valuable dividend cafe for you because I think most of us have spent the last week after the GDP number came out and it was negative for

the second quarter in a row, then it really just launched this kind of flush of inane, tribal, sort of ridiculous commentary. And I'm trying to avoid the ridiculous and the inane at the Dividend Cafe and present some objective and useful economic perspective. And I want to give you a little background and primer on recessions, on GDP, and finally, we're going to talk a bit about jobs. Listen, I do understand why the topic is somewhat politicized. Part of the problem with that is there is a tendency to want to give a political power, particularly a president, so much credit for good things in the economy when they happen. And there's a tendency to want to give a president so much blame. And that is something that's been going on for a very long time. And so what happens out of that is every issue like this becomes naturally very politicized. And it's not like a first time,

but the party before did it and the opposition party would do it and so forth. And so you get this kind of cycle of interpreting economic data through a lens of how it can either help or hurt someone politically. And I don't think it's a secret to people that are likely not a secret to most people watching or listening to this Dividend Cafe, I myself am a movement conservative. I use that expression all the time. There's a lot about the present populist strand of current right-wing politics I don't particularly relate to, but my ideology and my political philosophy is not left wing. And so I'm not coming here pretending to be objective personally about my own politics. What I am claiming to do is work tirelessly to not interpret economic data through a political lens or through the lens of what I

think I want to happen. This idea that when a Republican's president, Democrats would cheer a bad jobs number, or when a Democrat's president, Republicans would cheer a bad jobs number, I find it anti-American to some degree, and I certainly find it a little bit unfair to unemployed people. But I will tell you this, the recession talk right now is riddled with political context, and yet I get why. And very candidly, we have defined unofficially and loosely and practically speaking, a recession for a long time in our parlance and our just regular kind of conversation about these things as two quarters in a row of negative GDP growth. And so I want to say two things today. How do I want to word this? I believe that the GDP number

going down two quarters in a row is a technical recession, as has been historically understood. It is not a literal recession because there is no definition of a literal recession. The definition, I'm going to read to you right now word for word from the body who has been empowered with defining it, the National Bureau of Economic Research, has stated, a significant decline in economic activity that has spread across the economy and lasts more than a few months.

So the more than a few months thing is where you implicitly derive two quarters because a few months is three and three months is one quarter. And so more than a few months would go into that second quarter. And that's really where that's come from. I believe that it might be more interesting for us to not parse out how we want to view a recession, but to parse out how we want to view GDP, because I think that there is more predictive power as to where the economy is going in certain parts of where we are in measuring GDP. But as far as how they measure the recession, I believe very much that the MBR is earnest and consistent, they are looking for a big significant decline in activity. And

I think that in hindsight, they usually will label something a recession as early as four months later, and it's many times taken over a year. The reason for that is that the economic data can be somewhat complicated. There can be lagging indicators. I listed for you at dividendcafe.com all of the metrics that they use when they're analyzing monthly data, which includes things like personal income, non-farm payrolls, which is the jobs number, consumption expenditures, which we do see on a monthly basis, manufacturing, industrial production. But then on a quarterly basis, they're looking at GDP, and they supplement that with something called GDI, which is gross domestic income.

The reason for the monthly versus quarterly is that they want to be able to tell you the month in which they believe a trough actually ended or began, a peak actually ended or began. And so they're trying to time these economic cycles. And it isn't going to be perfect. It isn't going to be fully scientific. But a lot of the ambiguity this week comes from the fact that there's no governmental or academic definition of recession. fact that there is no governmental or academic definition of recession. So I can say that and not be carrying water for the Biden administration. It's ridiculous that somebody could accuse me of that. It is just a fact that there isn't a governmental or academic definition. And yet, I can also say that it has obviously been the historical use of the term two quarters in a row. And I'm not saying that to be a partisan against the Biden administration. These things are just objectively

true. The question is whether or not the recent GDP print really does speak to a recession. And what I think we have to be able to understand when we analyze this as market participants, as investors, as people interested in the state of the economy, is that these two things are true at once. That if we are in a recession right now, it is at this moment a very mild one. And whether or not it ends up being called a recession in hindsight, economic activity is clearly slowing down. But I want to go back to my point about GDP. And I hope you learn a little something out of this. And I beg your forgiveness.

You already know all of it. You know, GDP is their effort at kind of measuring the total market value of goods and services in a given country, and then even then in a certain period of time. So we talk about GDP growth, we're measuring the movement, the change in the total goods and services. So we had whatever goods and services we had last quarter, and then what did we do by way of growth around the output of goods and services to the next quarter? And so the formula we use to measure this is private consumption plus private investment plus government investment plus government spending plus the sum of exports minus imports, the trade deficit. So to kind of simplify that definition, you're looking at consumer activity plus business investment plus government spending and the trade deficit.

Those are kind of the four components, and they're weighted differently. So when you look under the hood of last quarter's GDP number, it was down 0.9% annualized. And what you basically see is that inventory levels came way down from where they were the quarter prior. The consumer spent more on services, but they spent less on goods. So the consumer was modestly when you blend those two things together up, but not much. The trade aspect benefited GDP growth because we did export more last quarter than we did the quarter before because of energy, which is something I had been forecasting. And we imported less last quarter than we did the quarter before because of energy, which is something I had been forecasting. And we imported less last quarter than we did the quarter before. Also something I was forecasting because of the China lockdowns and so forth. But I want to point something out

to you that I don't think is getting enough attention, that I want you guys to feel really kind of privileged in your understanding of this. The inventory is dropping and this aspect of less imports, it all speaks to kind of the same thing, which is that late last year, the supply chain was just in a state of total disarray. It's not fully improved now. There's still significant impairments, It's not fully improved now. There's still significant impairments. But companies seeing this debacle in supply chain were significantly ramping up inventories. So then into Q1 and especially Q2, they now needed less inventories.

So the decline in inventory, those changes of build-up inventory has come way down. And likewise, our need to import earlier as they were already building up supply chain went down. And then you combine that with the China lockdown, that changed. So you've had this push-pull reality. The consumer activity also, again, when you look at it comparatively, coming out of the lockdown, the consumer has lately been spending more on services, previously had been spending a lot more on goods. And so you see a kind of change in consumer behavior. You see a change in inventory levels. A lot of this has been reflected this quarter in earnings results at key, very large national retailers. But these two dynamics are essentially the idiosyncratic component of GDP that are, to me, a byproduct

of various decisions, and in a lot of cases, outright failures during and after the COVID moment. But the lockdowns and the reopenings, the reopening was necessary because of lockdown. If it weren't lockdown, there wouldn't have been anything to reopen from. It created a unique economic moment. And then the supply chain disruption created a particularly disruptive economic moment that has led to some of these sort of idiosyncratic things in the GDP number. But they are real. They happened. I'm not discounting them. But I want to point out that when I look at the GDP number in these four components, the inventories are the things by definition most likely to have an impact in a quarter,

but not be predictive. And a buildup of inventory normally means you don't need to build up inventory as much the next quarter. And a depletion of inventory, same thing. These generally are more particular events at a moment in time. Likewise, I think that import-export movement,

as long as total trade is going higher, and total trade is up 21% from a year ago, total trade is imports plus exports, where what we're measuring in GDP, because we're trying to get a national impact is exports minus imports. And I hope our export number continues going higher, not because I'm being mercantilist about it, but because I think it would mean that we're producing more oil and gas and meeting more of the energy needs of the world, which I would love to see happen because I prefer the world by oil and gas from us and not autocratic authoritarian regime. But that's just me. So in terms of the aspects that really get to the meat of GDP, you hear all the time, well, it's really about the consumer. And it is true that the consumer activity between goods and services is the heaviest weighted component in GDP. But I would suggest that that's the element that, again, it's highly lagging because it's telling you what the consumer just got done doing based on what they just got done feeling.

And we already know they may not have credit. They may not have jobs. They may not have income. But they don't lose their desire to spend. The animal spirit is a pretty permanent dynamic of the human being, but particularly the American consumer. There are events that bring down Americans' ability to consume. And when we see that, it almost always means you're already into a recession. But I think when we're talking about predicting where the economy is going, that it isn't trade, it isn't inventory, and it isn't the consumer that is the most useful indicator. I believe so strongly that economic health is measured by output and productivity, and in fact,

that's all GDP is supposed to be measuring is total output, our overall value of goods and services. Because I believe that that's what this is about, it is business investment, what they define in the GDP formula as non-residential fixed investment that I think is the operative indicator. And in the second quarter, business investment was basically totally flat. So what created the slightly negative number was a takedown in inventory and a negative amount of spending in consumer goods, largely because they had been spending so much on goods before. Then you had positives trying to offset that with consumer and spend in services and the trade deficit working to the advantage of GDP growth. But then you had business investment dead flat and it just so it wasn't strong enough to pull the total GDP number into positive territory. And I don't have a critique to offer of the GDP formula. I think

it's fine. I don't think it's perfect. I myself would probably tweak a few things, but it's worked. It's what we've done. And it doesn't really matter if some people would like to see it be a bit different because we got to measure this apples to apples and this is the formula that we've had. But my point being business investment is what a supply-sider and a sort of classical Austrian economist like myself looks to. I think that when businesses invest in the future, they're creating the goods and services

that are going to drive economic growth. Out of that kind of productivity is where you get a sustained prosperity and most certainly are going to foster more job creation. Yes, the consumer is going to end up consuming more if we're producing more. And by the way, the consumer consumes less if we produce less. Think about that one for a second. So the production side is what I think is going to ultimately prove most important. And I don't think we got a great look at that in the last GDP number with it sitting there at the flat line. And I've made this comment many times, but on a sustained period of impressive economic expansion, you generally don't have a lot of volatility in the business investment. It's a good, healthy contributor. And in a sustained period of either lackluster economic growth, let alone a contraction, business investment is usually the indicator about how bad things are or are going. But I mentioned that heavy business

investment helps foster this productivity and generate jobs. And I think the jobs thing is where I kind of want to conclude this talk today. Look, I think the labor market is loosening, but the jobs report today is certainly not saying so. 528,000 jobs increased last month. It doubled what was the expectation. Unemployment rates down to 3.5%. Wage growth was up another half a point last month. It's up over 5% from a year ago. You have a very strong jobs environment, yet the weekly initial jobless claims have inched up, but not dramatically. But we're about 200,000 a week of weekly jobless claims, and it's gotten up to over 250,000. So it's moved. But I think that the job openings number is another indicator of where

things have cooled down a bit, but are still quite healthy. We had well over 11 million job openings number is another indicator of where things have cooled down a bit but are still quite healthy. We had well over 11 million job openings. It's come down to 10.7, but that's still double the amount of people looking for work. And that's incredibly rare to have this many more job openings than you have people looking for jobs. So I don't understand how we could argue around these facts that the jobs number may be loosening, but so far still looks at an absolute level to be quite healthy. And that's in the context of an economy that is seeming to be slowing around muted business investment, declining inventories, and a mixed bag consumer between goods and services. That's the environment we're in. The thing I want to point

out is that in the healthy jobs number, a 3.5% unemployment rate, we still don't have the amount of people working that we did before COVID. You say, well, how has the unemployment rate come down so much then? That labor participation force, the amount of people either working or looking for work dropped so much that the denominator came down and this is where we are. And so there's a chart at dividendcafe.com this week that I think will be useful for you to understand. And in fact, there's a separate chart even showing where that decline is most visible in labor participation for us. Still from ages 16 to 24 and ages 55 plus.

And there's a lot of reasons that I've written about before and talked about before why that bothers me at both age groups. But a lot of people out of the workforce from 16 to 24 is not good in the current. It's distorting the jobs reality, but it's really not good for the future either. You want people developing the muscle of work. And I think that you lose a future productivity for the people who are out of the workforce now. And so while it has the data impact it has around current jobs reality, what we really can't measure is what it's meaning into the future. A healthy labor participation force might show a slightly higher unemployment rate, but it might be better for the overall growth of the economy in the short, mid, and long term because we would have more future workers being trained, being developed, being

matured, and all of these things. So the labor participation force is a very key economic metric that just simply doesn't have enough political appeal to get people's attention on either side of the divide. I believe, to sum up where we are economically, that this should be called a recession for those using the traditional definition and the political, tribalistic, media biases, whatever that may keep people from doing it. It's just those things are what they are. OK, but you there's no problem putting an asterisk around that. It's not a caveat to one's political beliefs to point out that even with technically negative GDP growth for two quarters in a row, that's happening in a period where most people have jobs.

The question is, are they going to still have jobs? Is that loosening labor market going to change the picture later? But right now, it most certainly is not. And so we just have to kind of take a nuanced both-and view of this, because it's the reality of the situation, and we're not going to alter reality. But I believe that the far more important point that we want to focus on, because we can't change the fact that the lockdowns happened, the reopening happened the way they did. And there was a V-shaped recovery that happened in the economy. In 2021, you got a lot of pushback into the economy out of the contraction that had happened, goods, services, jobs in the lockdowns. But see, what happened during that period is a whole lot of fiscal things and a whole lot of monetary things. Interest rates coming way down, tons of liquidity put into the banking system, and tons of spending and indebtedness. Now that fiscal and monetary stuff is being cleaned up.

And is that going to create a recession? Or as I concluded Dividend Cafe with today, a ruckus? Because they both start with R, and you can use whatever R word you want, but I can promise you this, it's one or the other, or both. It's not neither. The cleanup of the fiscal and monetary side from the COVID moment and post-COVID moment, that's what we're dealing with here. The rest of it is largely kind of semantics. So we'll continue to try to give you this economic perspective, divorced of various political biases each and every week. I hope it's been helpful. I hope you have a little bit

better understanding of recessions, how they're measured, what they are, and GDP growth. I am off to my appointments and I wish you and yours a wonderful day and a wonderful weekend. Thanks for listening to and watching and subscribing to right now in your feed, subscribing to Divid sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this Thank you. Presentations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced.

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