Market Update

Market Update

May 10, 2022
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Last week we received our first reading (it will be revised several times) of the Gross Domestic Product of the United States in the first quarter of 2022 (more on this under Economy Contracts).  The Gross Domestic Product or GDP is a measure of the growth of our economy, and it surprised by showing a decline of 1.4%.  This is a case where the headline does not match the details.  First off, the fourth quarter showed an increase of 6.9% which is well above our normal trend growth so an average of the two quarters would be a better gauge as the U.S. economy does not usually make this dramatic of a move.  Second, the biggest culprits where a drop in government spending (expected as we ween ourselves from the COVID stimuluses), inventories (came back to more normal levels from a large build of inventories in the 4th quarter) and foreign trade (effected by the Chinese COVID lockdown and effects felt in Europe from the Russian invasion of Ukraine).  The first two were expected and the third could end soon with a reopening of China when their COVID wave ends and a resolution to the Russian invasion.    

                The GDP report showed several areas of increasing growth, but I would contend the most important is the increase in household spending and business spending (productive facilities, equipment, and technologies).  These two areas are where we would be the most concerned with declining economic growth and they both are increasing.  What we are feeling as negative is more of an adjustment to getting back to more normal levels like we saw before the COVID pandemic.  Think about it, we witnessed the greatest economic decline and recovery in the history of the United States in the last 2 years due to the COVID lockdowns and then recovery due to the greatest money printing we have seen in our history.  We are now in the digestion phase where prices of houses, stocks, bonds, cars, etc. are trying to reconcile what a fair price should be.    

                While I have concerns about longer term effects on our economy from China, the Federal Reserve, wars, and government debts (not just our own), the negative growth in the 1st quarter GDP report was not a sign to me of an imminent recession.  To clarify, when I say imminent recession, I’m referring to the typical drop in consumer spending, business spending and increase in defaults/delinquencies of loans.  Please let me know if you have any questions and I am more then happy to dive in further with you.