Q3 GDP advance estimate points to growth but the economy is still firmly in the woods

Earlier this year, I wrote a column in this space with the following headline: “Are we in a recession or just living in a world of mixed economic indicators?” That article touched upon many of the same things related to the economy that we all remain keenly focused on today.

Those things include the myriad issues we all think about as they relate to economic concerns, including record-high inflation readings, high gasoline prices and declining home sales, and declining (but still on the right side of growth) manufacturing output are a few that come to mind. Conversely, though, unemployment rates, in the 3%-to-3.5% range, remain at, or close to, 50-year pre-pandemic lows, and consumer spending remains solid overall, as seen in monthly retail sales data.

That said, there is, and has been, a fair amount of commentary and data pointing to a recession. The primary reason for that has to do with United States GDP (Gross Domestic Product) readings issued by the U.S. Bureau of Economic Analysis (BEA) over the course of 2022.

First and second quarter GDP readings came in at -1.6% and -0.6%, respectively. Two straight months of GDP typically signal that a recession is underway. But it was not as linear, in this case, given the abundance of aforementioned mixed economic indicators.

Amid the ongoing uncertainty, though, BEA issued its Advance Estimate for third quarter GDP, and the data was encouraging, showing that GDP grew 0.6% (and 2.6% annually), a welcome shift from the previous two quarters, with the official tally coming on November 30.

BEA officials explained that the increase “reflected increases in exports, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending, that were partly offset by decreases in residential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.”

BEA also noted that the increase in exports reflected increases in goods and services.

The services aspect is something which really cannot be understated, with many people opting to go on vacations, or to ballgames, concerts, movies, and other experiences-based things, as opposed to buying goods, which was prevalent over the course of the pandemic, with people stuck at home.

That transition to services has been evident in freight transportation volumes to, for the most part, as there has been a notable decline in imports at West Coast ports in recent months, flattish-to-declining truck tonnage readings, and also rail carload volumes, which are seeing some improvements off of difficult annual comparisons, and also intermodal volumes.

Amid all of these factors, mortgage rates keep climbing, which ostensibly may not be good news for freight-related movements, coupled with ongoing aggressive moves by the Federal Reserve as it has raised interest rates five times, to date, in 2022.

There are also high inventory levels to consider as well. Many Wall Street analysts and freight transportation and logistics executives have indicated that the combination of elevated inventory levels, especially compared to a year ago at this time, and declining imports could spell the end of the traditional peak season as we know it. But, to be fair, Peak Season patterns since the onset of the pandemic in early 2020 have been anything but normal, for a whole host of reasons. One also needs to keep in mind that freight rates have largely been on the decline, in tandem with moderating demand and import levels.

So, are we in a recession? Maybe it depends on who you ask. Seriously, though, it is a fair question, with a few different reasons, each of which could be well supported, no question.

A friend of mine recently spoke with his financial advisor and shared some interesting takeaways with me, including:

• a recession is already “priced in” and is a key factor as to why the stock market is down;
• there remains a question of it will be a technical or shallow recession, which is expected; and
• the market is always looking six-to-12 months ahead, with less concern on where things presently stand or in the short-term

In the always-excellent Port Tracker report, issued by the Washington, D.C.-based National Retail Federation and maritime consultancy Hackett Associates, Ben Hackett, Founder of Hackett Associates, summed things up this way:

“Consumer spending…remains strong with a 0.4 percent month-over-month increase in September despite an increase in earnings of only 0.3 percent,” he wrote. “The increase in spending runs counter to the declining import of goods, suggesting a combination of inflation driving up prices and consumers shopping early to beat further inflation before the holiday season. Large retailers have responded by holding sales sooner to clear their inventory of goods that were brought in early this year to ensure that shelves could be stocked and to beat freight rate increases that have now come to an end.”

And Tom Schmitt, Forward Air CEO, recently told me that going back to the beginning of the year, in terms of the talk regarding a recession, that if there is a recession, please just bring it on.

“The reason for that is I find the talk and being scared about it much more paralyzing than actually just getting through it and working through it,” he said. “Great companies find a way to come out of recessions stronger. So, let's just bring it on, get through it, and get back out stronger. If there is a recession, let’s not wait for it. Let's just assume it's there, and then let's manage it…and find ways to get together and stronger.”

What happens from here remains to be seen, given the confluence of data, sentiment, and macroeconomic trends and there. One thing that remains certain is that the supply chain continues to remain front and center for it all. A recession could very well be coming. We all need to be ready to ride it out and go from there.