April 29, 2023 | GDP Report, Inflation, Recession, Diet Drugs and Change is Coming to Mortgages

GDP Report
While the GDP report showed the economy grew at an annualized seasonally adjusted rate of just 1.1% and was below expectations of 2.0%, it showed the consumer is still spending. In total, the consumer portion of GDP grew 3.7% as goods increased 6.5% and services spending grew 2.3%. What really hurt the report was private investment as it subtracted 2.34% from the headline number. Within private investment, the change in private inventories subtracted 2.26% from the headline GDP number. Residential investment was a negative in the report as it fell 4.2% and investment in equipment was also lower by 7.3%. Positives in the private investment space included nonresidential structures which saw spending grow 11.2% and intellectual property was up 3.8%. This report continues to make me believe that while the consumer may slowdown overall the economy is still in an ok spot. Companies will also likely need to rebuild those inventories which should be a benefit to GDP in future quarters.

Inflation
Positive news on the inflation fronts as the Fed's preferred measure, PCE, registered a year-over-year increase of 4.2%. This compares to last month's reading of 5.1%. Energy costs were a major benefit in the report as they were down 9.8% compared to last year. Critics will point to the Core PCE, which excludes food and energy. It came in at 4.6%, above expectations of 4.5% and barely below last month's reading of 4.7%. With that said I continue to believe energy is a core part of costs for businesses and with a leveling off in energy prices, I believe core inflation will continue to subside through the remainder of this year. Overall, I believe this was a good report as it continues to show inflation moving lower.

Recession
I continue to say I do not see how we would have any type of meaningful recession or perhaps even a recession at all. I have pointed out how strong the job market is and that when people have a job they will not pull back dramatically on their spending. Another reason why I do not see a major recession coming is because of what’s known as the M2 money supply. The M2 money supply is virtually all the liquid money in the economy, and it includes short-term CDs, checking accounts, savings, and money markets. It has pulled back from the peak one year ago of $21.6 trillion to a current level of $21.1 trillion. I continue to compare data to the great economy that we had back in 2019 before Covid and on December 31st of 2019 the M2 money supply was $15.3 trillion. So here we sit with anybody that wants a job can get one and liquid money in the economy (roughly $6 trillion more than back during the good economy in 2019). I have to ask how in the world could we have a major recession with so many people working and so much available money?

Diet Drugs
Maybe the pandemic is to blame or maybe it is the availability of too much food, but according to the Federal Centers for Disease Control and Prevention obesity has risen from 31% in 1999 to 42% in 2020. This is despite the fact that in 2020 there were $76 billion in sales for weight loss, medical programs, diet soda, low calorie frozen food and gym memberships. This all could be changing because of three diet drugs that have hit the market: Ozempic, Wegovy and Mounjaro. These new drugs don’t come cheap ranging from $900-$1400 for a one-month supply. Some side effects include nausea and diarrhea. I do question if it is different this time? I remember back in the 1990s the diet drug fen-phen was pulled from the shelves because users developed heart issues. Another over-the-counter diet drug Dexatrim was also linked to increased risk of strokes. Both drug companies, Novo Nordisk and Eli Lilly are hot now, but in this litigious society that we live in I just wonder how long it will be before the major billion-dollar lawsuits come out against these companies.