The U.S. economy, standing on the edge of the cliff

According to the latest U.S. GDP data last Thursday, the preliminary annualized quarterly value of U.S. real GDP for the third quarter was 2.6%, higher than the market estimate of 2.4%.

Looks like a pretty good number.

After all, the official adjusted U.S. GDP for the previous two quarters.

The annualized quarterly rate for the first quarter was -1.6%.

The annualized quarterly rate for the second quarter was -0.6%.

Now, at 2.6% in the third quarter, doesn’t that suggest that U.S. economic growth is recovering rapidly?

No, no, no, you really shouldn’t be fooled by these U.S. GDP indicators.

The first quarter of U.S. GDP, which looks bad, is actually not that bad, a problem I wrote about when the algorithm for its GDP growth was given back to the wrong one.

“-1.4% represents stagflation? You don’t know anything about U.S. economic data!”

U.S. GDP in the third quarter, which looks good, is actually very poor, and one could even say that it is just a return of the U.S. economy before the recession.

Why do you say so? Let’s look at two aspects.

One is the character of the quarterly rate data.

The second is the problem of the GDP breakdown.

The so-called “quarterly rate” is in fact the “chain” growth rate, that is, compared with the growth of the previous quarter – let’s say if I earned $100 in the fourth quarter of last year and $80 in the first quarter of this year. For example, if I earned $100 in the fourth quarter of last year and $80 in the first quarter of this year, then the quarter-on-quarter growth is -20%, and if I earned $72 in the second quarter, then the quarter-on-quarter growth is -10%, which is two quarters in a row of negative growth.

In this case, as long as I earn more than $72 in the third quarter, that is positive growth – let’s say I earn $75 that is positive growth of 4.2%, it becomes positive growth.

But what actually happens?

This $75 is indeed a little bit better than $72, but in reality it is not even $80 in the first quarter.

And what does “annualized quarterly rate” mean?

The annualized quarterly rate means that the growth rate of the quarter is assumed to last for 4 quarters (a year), so it needs to be quadratic, and the specific formula is.

(Current quarter GDP / Previous quarter GDP)^4 – 1

Take the data just now, the annualized quarterly rate of money earned in the first quarter is (80/100) ^4 – 1 = -59%, while the third quarter is (75/72) ^4 – 1 = 17.7%.

Now you see what the 2.6% annualized quarterly rate of U.S. GDP in the third quarter is really all about – purely a weak increase on top of a low base after regressing in the previous two quarters.

Looking at the “breakdown”, you can better understand the moisture in the 2.6% figure for the US.

We all know that from an expenditure perspective, a country’s GDP = consumption + investment + net exports, which is also known as the “troika” of GDP.

Further, if we take into account government consumption and investment, GDP = private consumption + private investment + government spending + net exports.

In the following two tables, the China Merchants Macro Research team decomposes the contribution of U.S. GDP growth in the last 5 quarters, so we can see which subset successfully drove the U.S. GDP in the third quarter.

Look at the “growth rates” of the other most important items for the U.S. economy.

Private consumption, 1.4%

Private investment, -8.5%!

Imports, -6.9%!

Government spending and investment, 2.4%

Specifically, of the contribution of this growth rate of 2.6%

Personal consumption is 1.0%

Private investment is -1.6%

Government spending and investment is 0.4%.

In other words, if you remove the net exports of 2.8%, the U.S. GDP growth in the third quarter, properly or negative value!

In this case, if the next quarter of U.S. export growth is a little weak, then the U.S. economy is not a crash to fall down?

So let’s take a good look again, why the U.S. Empire‚Äôs exports in the third quarter became so bullish?

The answer is: energy exports.

See the four words, I guess we immediately understand.

In the past three quarters, because of the Russian-Ukrainian war, Europe’s gas prices soared, crude oil prices soared, and the United States took the opportunity to rivet the crude oil and natural gas to Europe, it seems to be supporting Europe against Russia, but in fact is to make a strong effort to suck the blood of Europe……

When the U.S. private investment and personal consumption tend to be weak, energy prices, unless like the third quarter on the second quarter growth, then, even if the energy prices in the third quarter to maintain high, that also means that the next month, the U.S. export growth rate is 0, and then, coupled with the weakness of private investment, private consumption, the U.S. economy, almost doomed to fall into a recession in the hole.

Unless, global energy prices continue to skyrocket in the fourth quarter, and Europe continues to be doubled bloodsucking……

In particular, we take the U.S. economy in the third quarter to pull “up to -1.6%” of private investment to see why the United States is bound to fall into the pit of recession.

First, we need to understand why the U.S. private investment will be so bad, especially residential investment, the annualized quarterly rate is -26.4%, the worst level since the subprime mortgage crisis?

The answer comes from the Fed’s rate hikes!

In the Federal Reserve continued to raise interest rates, as the benchmark for U.S. mortgage 30-year fixed mortgage rates, has been as high as 7.08%, so high interest rates, residential prices have fallen significantly, and in this case, who will still go to the initiative to invest in residential?

Then look at the Case Sheller Index showing the home price index for the 20 largest U.S. metropolitan areas over the last 20 years.

In June, the home price index for the 20 largest cities was 316, in August it had become 310, and the data for September and October are not yet available, but it is certain to be worse, because in August the 30-year mortgage rate was only 5%, and now it is 7% – clearly, U.S. home prices are turning around fast.

Image data source: Federal Reserve.

Now you come to ask, why is private investment in the U.S. so bad?

Isn’t that pretty clear?

Now the house prices turn around, just like the house prices turn around in 2007, the subprime mortgage crisis is about to break out, the house cannot be sold, who will rush to borrow money at the highest interest rates and invest in a number of residential, you are too slow to break your own bankruptcy?

Not only investment is affected by high interest rates, consumption is also suppressed by high interest rates, the last few quarters, are negative growth.

As for the U.S. government spending, it is now impossible to be like 2020 again, directly trillions of dollars to send money, right?

Going back to that formula of GDP = private investment + private consumption + government spending + net exports, how far do you think the U.S. economy is from recession now?

It’s clearly standing on the precipice of recession!

It looks like the U.S. posted a pretty good GDP result for the third quarter, but in reality –

The U.S. recession will either be in the fourth quarter of 2022 or in the first quarter of 2023.


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