Qualitative Fundamental Analysis of US Economy Sep.2022
Most important factor for the economy is how GPD behaves. Several economic indicators will be observed, in order to obtain the whole economical situation and GDP growth.
Technical Recession is defined when Real GDP has 2 negative consecutive quarters.
2022,Q1: -1,6 %
2022,Q2: -0,6 %
2022,Q3:
2022,Q4:
Inflation target: 2%
Actual: 8,3 %
Unemployment rate target: 3,7-4%
Actual: 3,7%
GDP Growth target:
Actual:
Yields
From the chart above can be seen that Yield Curve 10-2 is going down and most importantly - the curve is already below zero. Last time, when the curve reached this level was back in 2000 and 1 year later the "The great Recession" happened.
We can also seen that the 10Y Yields and 2Y Yields are going high, which is deflationary for the economy. The 2Y Yields already crossed up 10Y Yields and this means that investors are worried about the future economy situation.
Yield Curve(all Yields) is inverted. This happens if the economy shrink or is going to contract.
Since Jan.2022 the Yields are going high, but the Stock market and GDP are going down. At this moment there is no perspective for changes
Corporate Bonds and Credit Spread
There is a strong correlation between the spread and GDP. Spread go up - GDP contract.
Money Supply M2
M2 is most important measure of money supply and is used as injection and withdraw to control inflation, growth and value of the currency.
From the chart above we can see that in 2020 when there was the Covid crisis, the FED aggressively printed more money to avoid recession. But this time the inflation is too high and they can not print more money. This means that they can not inject money in the economy and it will deflate.
Interest rates (FED Fund Rates)
Last two crisis (2008 and 2020) the FED actually reduced the Interest Rates in order to fight with the recession. This time they could not do it, because the rates were already 0 %. In order to fight with the inflation they will increase the rates and this move will make the economy to shrink more.
ISM PMI, NMI
In Mar. 2021 the indexes peaked and since then they go down. These indexes are leading indicators about GDP growth. Right now they are above 50 level, but when they fall below 50 and then GDP will definitely contract a lot.
Consumer Sentiment Index(UMCSI)
The level of confidence that consumers have about the stability and future prospects can be used to understand the overall trend of the economy.
As we can see there is no confidence about the future prospects - not at all.
From this indicator we can suggest that the economy will shrink.
Building Permits
It seems that the Permits already peaked at dec.2021 and now are going down.
Developers are bearish on the prospects of the future home sales.
This indicator lead us, that GDP will contract.
NFIB Business Optimism Index
It seems that business are not optimistic about the future, so they will not hire people and not make new investments. Very soon the index will fall below 90 level and this will be very strong indication about the economy contraction.
Trade weighted USD Index
Generally the rising index is deflationary for the Cyclical commodities. Which are very good indicator about future Inflation.
Cyclical Commodities
It seems that some commodities like copper, Crude Oil, Lumber, Iron already peaked and started to fall.
The logic here is, when the commodities prices are going down, the inflation should go down too.
CPI/ Core CPI
We know that current inflation is much more then the FED target of 2%.
Increasing the Interest Rates make dollar more attractive for the investors, thats why all USD Indexes are going up, which makes commodities prices to go down.
If we consider all these facts, we can predict that inflation will go down in future in future.
PPI/ Core PPI
It seems that PPI indexes already peaked and now are going down.
Employment Situation Report
The future expectations about economy are negative, this will lead the unemployment to grow, exactly as 2020 or may be more.
Future deflation and unemployment growth will shrink the economy and GDP will go down.
Balance Sheet , Debt, Deficit
In Covid crisis, when GDP went down the FED printed more money, which increased the Balance Sheet and Debt. The big debt brought more deficit for USA.
Higher debt means more pressure to inflate. The only choices are to deflate, default on debt or inflate further.
In 2020 the debt was above 100% and the Government chose to inflate more and avoid recession. The debt rose to around 140%. Levels above 100% are very critical, the debt was never bigger then now.
In this case I believe the Government will chose to deflate and GDP will fall.
SUMMERY
The economy is technically in recession and all economical indicators shows, that the deflation just started and GDP will go down for a while.
Historically the FED just printed more money, inflate more and avoid a long period of GDP contraction or even recession. Right now the inflation is out of control and the hawkish FED already announced, that the priority is to bring the inflation back to normal, by increasing the Interest Rates.
This aggressive move will make GDP to contract further and economy to shrink further.
Indicator --Economy, GDP--Commenter
Yields--contraction--Increasing the IR will move the Yields higher, 2Y Yields will increase rapidly
Credit Spread--contraction--The spread, already started to go high
M2 Money Supply---contraction---It seems that this time will be no injection, but withdraws.
FED Fund Rates---contraction---The FED are very hawkish, that will increase the rates, no matter what.
S&P 500 VIX Index -------------- not observed
ISM PMI/NMI--- contraction---Already peaked. New orders predict PMI will go down further
UMCSI---contraction---It is below 50 level, which is very bearish
Building Permits---contraction---Near the peak level, may be already peaked.
NFIB Business optimism index---contraction---Already reached level 90, below this level it is very bearish.
Trade weighted US Dollar Index---deflation---Rising Dollar Index will deflate the Commodities.
Cyclical Commodities---deflation---For now prices are going down.
CPI/ Core CPI---deflation---It seems that Inflation peaked, Commodities are going down, IR are going up .
PPI---deflation---Same as CPI.
Employment--- deflation---If economy shrink, unemployment will rise, may be to the levels of 2020.
Debt/Deficit/Balance sheet---deflation---Debt is already above the critical level (100%), probably the the Government will deflate this time.
Stock market ---contraction---Stock market is leading indicator for GDP, since Jan.2020 stocks are falling.
Technical Recession is defined when Real GDP has 2 negative consecutive quarters.
2022,Q1: -1,6 %
2022,Q2: -0,6 %
2022,Q3:
2022,Q4:
Inflation target: 2%
Actual: 8,3 %
Unemployment rate target: 3,7-4%
Actual: 3,7%
GDP Growth target:
Actual:
Yields
From the chart above can be seen that Yield Curve 10-2 is going down and most importantly - the curve is already below zero. Last time, when the curve reached this level was back in 2000 and 1 year later the "The great Recession" happened.
We can also seen that the 10Y Yields and 2Y Yields are going high, which is deflationary for the economy. The 2Y Yields already crossed up 10Y Yields and this means that investors are worried about the future economy situation.
Yield Curve(all Yields) is inverted. This happens if the economy shrink or is going to contract.
Since Jan.2022 the Yields are going high, but the Stock market and GDP are going down. At this moment there is no perspective for changes
Corporate Bonds and Credit Spread
There is a strong correlation between the spread and GDP. Spread go up - GDP contract.
Money Supply M2
M2 is most important measure of money supply and is used as injection and withdraw to control inflation, growth and value of the currency.
From the chart above we can see that in 2020 when there was the Covid crisis, the FED aggressively printed more money to avoid recession. But this time the inflation is too high and they can not print more money. This means that they can not inject money in the economy and it will deflate.
Interest rates (FED Fund Rates)
Last two crisis (2008 and 2020) the FED actually reduced the Interest Rates in order to fight with the recession. This time they could not do it, because the rates were already 0 %. In order to fight with the inflation they will increase the rates and this move will make the economy to shrink more.
ISM PMI, NMI
In Mar. 2021 the indexes peaked and since then they go down. These indexes are leading indicators about GDP growth. Right now they are above 50 level, but when they fall below 50 and then GDP will definitely contract a lot.
Consumer Sentiment Index(UMCSI)
The level of confidence that consumers have about the stability and future prospects can be used to understand the overall trend of the economy.
As we can see there is no confidence about the future prospects - not at all.
From this indicator we can suggest that the economy will shrink.
Building Permits
It seems that the Permits already peaked at dec.2021 and now are going down.
Developers are bearish on the prospects of the future home sales.
This indicator lead us, that GDP will contract.
NFIB Business Optimism Index
It seems that business are not optimistic about the future, so they will not hire people and not make new investments. Very soon the index will fall below 90 level and this will be very strong indication about the economy contraction.
Trade weighted USD Index
Generally the rising index is deflationary for the Cyclical commodities. Which are very good indicator about future Inflation.
Cyclical Commodities
It seems that some commodities like copper, Crude Oil, Lumber, Iron already peaked and started to fall.
The logic here is, when the commodities prices are going down, the inflation should go down too.
CPI/ Core CPI
We know that current inflation is much more then the FED target of 2%.
Increasing the Interest Rates make dollar more attractive for the investors, thats why all USD Indexes are going up, which makes commodities prices to go down.
If we consider all these facts, we can predict that inflation will go down in future in future.
PPI/ Core PPI
It seems that PPI indexes already peaked and now are going down.
Employment Situation Report
The future expectations about economy are negative, this will lead the unemployment to grow, exactly as 2020 or may be more.
Future deflation and unemployment growth will shrink the economy and GDP will go down.
Balance Sheet , Debt, Deficit
In Covid crisis, when GDP went down the FED printed more money, which increased the Balance Sheet and Debt. The big debt brought more deficit for USA.
Higher debt means more pressure to inflate. The only choices are to deflate, default on debt or inflate further.
In 2020 the debt was above 100% and the Government chose to inflate more and avoid recession. The debt rose to around 140%. Levels above 100% are very critical, the debt was never bigger then now.
In this case I believe the Government will chose to deflate and GDP will fall.
SUMMERY
The economy is technically in recession and all economical indicators shows, that the deflation just started and GDP will go down for a while.
Historically the FED just printed more money, inflate more and avoid a long period of GDP contraction or even recession. Right now the inflation is out of control and the hawkish FED already announced, that the priority is to bring the inflation back to normal, by increasing the Interest Rates.
This aggressive move will make GDP to contract further and economy to shrink further.
Indicator --Economy, GDP--Commenter
Yields--contraction--Increasing the IR will move the Yields higher, 2Y Yields will increase rapidly
Credit Spread--contraction--The spread, already started to go high
M2 Money Supply---contraction---It seems that this time will be no injection, but withdraws.
FED Fund Rates---contraction---The FED are very hawkish, that will increase the rates, no matter what.
S&P 500 VIX Index -------------- not observed
ISM PMI/NMI--- contraction---Already peaked. New orders predict PMI will go down further
UMCSI---contraction---It is below 50 level, which is very bearish
Building Permits---contraction---Near the peak level, may be already peaked.
NFIB Business optimism index---contraction---Already reached level 90, below this level it is very bearish.
Trade weighted US Dollar Index---deflation---Rising Dollar Index will deflate the Commodities.
Cyclical Commodities---deflation---For now prices are going down.
CPI/ Core CPI---deflation---It seems that Inflation peaked, Commodities are going down, IR are going up .
PPI---deflation---Same as CPI.
Employment--- deflation---If economy shrink, unemployment will rise, may be to the levels of 2020.
Debt/Deficit/Balance sheet---deflation---Debt is already above the critical level (100%), probably the the Government will deflate this time.
Stock market ---contraction---Stock market is leading indicator for GDP, since Jan.2020 stocks are falling.
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