“Didn’t I say it’s a mistake to educate women? But nobody listen to me! Now we have a boyfriend in the house. Is he nice Greek boy? NO!”
Gus Portokalos, “My Big Fat Greek Wedding”
There are few movies that infused the American mainstream’s psyche as deeply as “My Big Fat Greek Wedding” when it was released 20 years ago this past April. It’s impossible to pinpoint which character was more endearing. The wandering Greek grandmother, Aunt Voula with her twin in a neck growth, the brother and cousin who tricked the bride groom into attesting to having a third testicle, the WASP in-laws “Rodney & Harry” who conflated Greece with Armenia and Guatemala. The list goes on and on. The bottom line on a 30-year-old presumed old maid is that in “EEE-on,” as his name is over-pronounced she had finally found her match, much to the astonishment of her family that pronounced, “Christ has risen for sure if Toula has found a husband!” For us geeky word-meisters, the beauty is in the origins of the lovebirds. In Greek, the bride’s name, Fortoula, means “Light of God.” Meanwhile, the Scottish name Ian derives from Hebrew and means “Gift from God.” As far divided as the two silver screen personae were culturally, they were each other’s etymological destiny.
Hurricane Ian is not quite as endearing as John Corbett’s character was. At the time of this writing, Ian had pummeled Florida and prompted states of emergency declarations across Georgia, South Carolina, North Carolina, and Virginia. The United States can ill afford the estimated $67 billion in damages and counting after the revisions to Gross Domestic Product (GDP) we previewed yesterday. Bloomberg summed it up nicely: “Economic activity was weaker in the first half of 2022 than many thought. The preferred gauge of economic activity — the average of GDP and Gross Domestic Income (GDI) — now shows an annualized decline of 0.3% (vs. 0.4% expansion in previous data), a second consecutive quarter of contraction. That settles any debate over whether the economy was stronger than earlier GDP data suggested.”
Now that we can finally end the recession debate, we should assess where households think we are in the cycle. Per Bank of America’s latest survey, 45% of all U.S. households agree with the recession assessment. More importantly, 49% of those making between $125,000 and $250,000 think the U.S. economy is contracting (middle right chart). Within that cohort, 56% are worried their net worth is going to go up in smoke (bottom right chart). Can you blame them?
The good news, for those who missed the Weekly Quill’s special interview series with Dr. Lacy Hunt is that the veteran investor puts the probability of the Fed keeping interest rates at a high level at approximately zero. With Hunt’s words fresh on the mind, we were intrigued to read the feedback on those GDP revisions from one of the good doctor’s acolytes, FHN Financial Chief Economist Chris Low.
Boiling it down, the consumer was too hot and inventories too damn high headed into the current quarter. The bulk of the downward revision to GDI came from real wages, i.e., the spikes in credit card spending are as worrisome as we thought they were. Moreover, per Low, because bloated inventories are financed with short-term debt, making them that much more exposed to the Federal Reserve’s tightened monetary policy, the heat is on to slash stockpiles. As for GDP math, per Low, inventories being revised higher, raises “the prospect of a deeper recession next year as companies struggle to right-size them.”
QI’s Dr. Gates expands on Low’s premise: “When firms cut inventories in recessions (red line), they concurrently cut labor (green line). Information to date on the supply-side of the GDP, as in inventories, indicates significant private stockpiling during the first half of the year. Meanwhile, private final demand was expanding at a slower pace (turquoise line). For a full-blown recession to be plain to the naked eye, demand falling must be followed by depleted supply and a pick-up in virtual pink slip production.” With initial jobless claims south of the 200,000-mark in the latest week (green marker), we must wait out the fallout of tighter financing conditions squeezing the costly sin of inventory accumulation.
A perusal of the long-left chart illustrates that the cyclical side of the economy has already fallen off the cliff. Given the top quintile of earners (incomes north of $125,000) account for roughly 40% of consumption, it’s a safe bet that the splurging on services to celebrate the end of the pandemic lockdown, which offset the collapse in goods spending, is in the rearview mirror. Smarting from the losses they’ll see in their statements mailed out today, big spenders are going on strike. Think of Toula’s mom’s reaction to the Bundt cake — “There’s a hole in this cake.” – writ large.
As Low warns, “Tension is building between financing conditions, weakening demand and still elevated supply. When things snap, supply could ‘catch down’ in a violent manner. That’s when GDP faces downgrade risk and other key indicators like ISM and nonfarm payrolls will become vulnerable to a persistent – and potentially deep – contraction.” From here on out, we are nothing more than forensic economists, gauging the damage financial market hurricanes will leave in their wake.