Q1 GDP negative; but more importantly, two of three long leading indicators have deteriorated

Q1 GDP negative; but more importantly, two of three long leading indicators have deteriorated

First things first: yes, it was a negative GDP print. No, it doesn’t necessarily mean recession. I’ve been expecting weakness to show up by now ever since last summer; so here it is.

But the big culprits were non-core items. Personal consumption expenditures, even adjusted for inflation, were positive. The three big negatives were a big decline in exports vs. imports, followed in about equal measure by a decline in inventories and a downturn in defense production by the government. The inventory adjustment is temporary. So, most likely, was the downturn in defense production. We’ll see about exports and imports (supply chain issues!).

But there are two components of GDP which are helpful in finding out what lies ahead: real residential fixed investment (housing) and proprietors income (a proxy for business profits). Both of these have long and good track records as helping forecast the economy one year in advance. Here, the news was mixed, but a little more positive than negative.

Proprietors’ income (blue in the graph below) rose 1.2% nominally. Since unit labor costs have averaged an increase of 0.9% per quarter over the last year, they probably rose to a new high on an adjusted basis as well. This generally rises and falls with corporate profits (red), although it is not quite so leading. But since the latter won’t be reported for at least another month, it is a good placeholder:


So, this was a positive.

The news was more mixed in housing. Real private residential fixed investment rose slightly:


Further, both nominal and real residential fixed investment as a share of GDP (the actual measurement that is part of the long leading indicators) also rose for the quarter:


So far, so good. 

The problem is that recessions have typically happened on average 7 quarters after the last peak in this measure. And even with the improvement in Q1, this measure is still below its peak of one year ago. So real residential investment is still a negative for forecasting purposes.

In addition to the above two long leading components of GDP, real money supply for March was reported on Tuesday, and the news wasn’t good there, either.

Recessions have typically occurred one year or more after real M1 turns negative, or real M2 is up by less than 2.5% from one year previous. Here’s what they look like through March:


Real M1 is up 2.4% YoY, and has deteriorated rapidly, although it is still a positive. Real M2 is also up less than 2.5%, which means it is consistent with an oncoming recession.

All in all, the picture continues to deteriorate, even though the profits component held up in Q1.