Scott Minerd discusses the Federal Reserve’s largest rate hike since 1994.
The outlook for gross domestic product (GDP) growth has weakened considerably over the past few weeks. The negative first quarter real GDP figure initially looked to be largely reflective of temporary drags from trade and inventories, but the recent revision showed a less robust gain in GDP excluding these categories (from 4 percent to 3 percent). Additionally, recent data releases, most notably this morning’s personal consumption numbers, mean that second quarter real GDP is now tracking negative. Domestic demand has slowed considerably, as tracking for real GDP excluding inventories, government, and trade has fallen from 2.7 percent a few weeks ago to -0.1 percent in the latest estimate. These developments raise the risk of two straight quarters of negative real GDP growth, which is conventionally regarded as the definition of recession.
The GDP figures are not the only area of concern. The more forward-looking Leading Economic Index (LEI) has declined for the last three months through May, and there is a high likelihood that June will also be negative based on the drop in stock prices, a flatter yield curve, rising jobless claims, and falling consumer expectations. Historically, four consecutive monthly declines in the LEI have always foretold a recession.
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