Economic Conditions Are Oddly Better Than You Think In Some Ways And Worse Than You Think In Others | (11.30.22)
"In the midst of chaos, there is also opportunity." - Sun Tzu, The Art of War
What You Need To Know Today:
• Preliminary GDP for Q3 2022 was reported by the Bureau of Economic Analysis this morning coming in at 2.9%; beating the pre-report market expectation of 2.8%.1 It is important to note that GDP is reported in three stages (a month apart) —Advance, Preliminary, and Final. While the “Advance” look generally has the greatest market impact since it is both the first look and generally directionally correct, the figure will be revised until it reaches the “Final” stage. Also notable, the Q3 2022 reading breaks the streak of two consecutive quarters of negative GDP growth which is generally considered a leading indicator of recession. Does this mean we are clear of our recessionary fears? Unfortunately, it does not…
• ADP published the latest National Employment Report which measures the change in the number of employed people during the previous month (excluding the farming industry and government). According to ADP, private sector employment increased by 127,000 jobs in November and annual pay was up ~7.6% year-over-year.2 This reading is well below the pre-release market expectation of 196,000 — marking the largest slowdown in job creation since January 2021. It also illustrates the impact hawkish policy from the Fed is having on job creation. At this point, it is safe to say that most companies are no longer in a stage of hyper-hiring.
• The National Association of Realtors (NAR) published updated Pending Home Sales figures which measure the change in the number of homes under contract but are not yet closed (excluding new construction). Month-over-month pending sales came in at (-4.6%) beating the market forecast of (-5.8%).3 Further, contract signings declined in three of the four major U.S. regions measured during October 2022 with the exception being the Midwest. That said, on a year-over-year basis, all regions declined.
Chart Of The Day:
We know that many aspects of the U.S. economy are slowing down (albeit we are seeing positive GDP for Q3 2022) with real estate among the sectors most impacted. That said, we must remember that much of the slowdown is “intentional” and “Fed driven” through the tightening of monetary policy by way of interest rate hikes. They are doing this in order to fight the out-of-control inflationary environment we have been experiencing. So… just how impactful have interest rate hikes been on home sales so far? Well, according to data from Apollo Asset Management we are seeing the fastest housing slowdown on record during Fed interest rate hiking cycles. Look at that red line, it’s pretty jarring.
Cumulative Change In Single-Family Home Sales During Fed Hiking Cycles4
Source: Bureau of Economic Analysis — https://www.bea.gov/news/current-releases.
Source: ADP National Employment Report — https://adpemploymentreport.com/.
Source: National Association of Realtors (“NAR”) — https://www.nar.realtor/research-and-statistics/housing-statistics/pending-home-sales.
Source: NAR, Haver Analytics, Apollo Chief Economist. Data represents existing single-family home sales. Please note, this data represents single-family home sales during periods of Federal Fund Rate hikes ONLY. For this reason, the 2008 Global Financial Crisis (“GFC”) is not captured as interest rates were being cut at that time.