A Crisis Of Bad Data | Wolf Richter
When the data can't be trusted, how the heck can we know the true state of the economy?
The war of conflicting narratives continues.
Bulls point to Q2's robust GDP growth, still relatively low unemployment, an upside surprise in July retail sales, and record high prices for both stocks and existing homes.
Bears on the other hand warn about slowing Q3 estimated GDP growth, the triggering of the Sahm rule recession indicator, last week's massive downward revision in payrolls, rising consumer debt delinquencies and recent surveys reporting that half of American adults have less than $500 in savings.
When sentiment is full of such crosscurrents, it's prudent to seek the counsel of those who take a cold and calculated look at the data, to see what "is" vs what our biases may want us to see.
Which is why we're fortunate to speak with macro analyst Wolf Richter of WolfStreet.com, reknown for his vulcan-like focus on the data.
The problem is the data available to us is now more suspect than ever.
When the data can't be trusted, how the heck can we know the true state of the economy?
For Wolf’s outlook, click here or on the video below:
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Adam’s Notes: Wolf Richter (recorded 8.22.24)
EXECUTIVE SUMMARY
Wolf see the U.S. economy as having shown unexpected strength, despite high interest rates that were expected to slow growth. This resilience contrasts sharply with other economies, particularly in Europe and Canada, where the impact of high interest rates has been more pronounced, leading to significant economic slowdowns. One key factor in the U.S. is the prevalence of 30-year fixed-rate mortgages, which has shielded American consumers from the immediate impact of rising rates, unlike in other countries where variable-rate mortgages are more common.
Financial markets have been increasingly detached from the real economy due to years of quantitative easing (QE) and ultra-low interest rates since 2008. While the U.S. economy has grown at an average of about 2% per year, financial markets have surged disproportionately, leading to what Wolf describes as precarious and overvalued conditions. He argues that current market levels are risky, sustained more by speculative excess than by economic fundamentals.
Despite widespread predictions of an imminent recession, Wolf does not see evidence in the current data to support this. He has been expecting a recession since the Federal Reserve began aggressively raising rates in 2022, but so far, key indicators like negative GDP growth and rising unemployment have not materialized. The labor market remains robust, with job growth continuing and unemployment claims staying historically low, contradicting the recession forecasts.
The traditional significance of an inverted yield curve as a recession predictor has diminished, according to Wolf. The current yield curve inversion, where short-term yields are higher than long-term yields, has persisted for over two years without leading to a recession. Wolf attributes this to the massive interventions by central banks, such as QE and balance sheet management, which have artificially suppressed long-term yields and distorted the bond market’s natural signaling mechanisms.
The U.S. labor market data is being significantly affected by the large influx of illegal immigrants, estimated at over 6 million in the past two years. Many of these individuals are working but are not captured in official labor statistics, leading to an underestimation of the workforce size and complicating the interpretation of employment data. This influx has also moderated wage growth at the lower end of the income spectrum, particularly in service industries, by increasing the supply of labor willing to accept lower wages.
While inflation has moderated from its peak, particularly in durable goods, Wolf warns that
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