Lance Roberts: Odds Of Correction Grows As Economy Slows

Goal

Summarize the episode with the focus on the current status of the economy and economic data.

Economic Update: A Mixed Picture with Signs of Vulnerability

The latest economic data presents a complex and contradictory picture, showing some short-term strengths alongside underlying signs of a potential slowdown.

The Case for Economic Strength

• Gross Domestic Product (GDP): The final revision for the second quarter showed robust growth at 3.8%. This significant upward revision from previous estimates indicates a strong, albeit potentially temporary, burst of economic activity.
• Personal Income: It grew at 0.4%, slightly above the expected rate of 0.3%.

The Case for a Slowdown

Despite the strong GDP number, several key indicators suggest the economy is on a precarious footing:

• GDP Caveat: A large part of the second-quarter GDP growth was driven by a normalization of the trade balance. This followed the “front-loading” of imports in the first quarter to avoid tariffs, meaning the headline number may not reflect a genuine, sustainable increase in economic output.
• Consumer Behavior: Consumer spending is outpacing income. Personal income grew at 0.4%, while personal expenditures rose at a faster 0.6%. This trend, where consumers are likely using savings or taking on debt to sustain their spending, is unsustainable and often precedes a broader economic slowdown.
• Leading Economic Index (LEI): The LEI has remained negative and recently turned lower. While the LEI’s historical correlation with recessions was disrupted in 2022—an anomaly attributed to massive pandemic-era fiscal and monetary stimuli—its continued decline is a traditional warning sign.
• Yield Curve: The recent “un-inversion” of the yield curve (the spread between the 2-year and 10-year Treasury yields) is a classic indicator of an impending recession, as this pattern has historically preceded economic downturns.
• Full-Time vs. Part-Time Employment: The share of full-time employment has a strong correlation with economic health. A decline in full-time jobs, and a corresponding rise in part-time work, signals that employees may lack benefits and sufficient income to support robust consumer spending and broader economic growth.

Summary

In conclusion, while the headline GDP figure is positive, a deeper look at the data reveals significant vulnerabilities. The unsustainability of consumer spending, a declining Leading Economic Index, the flattening yield curve, and shifts in the employment landscape all point toward a potential economic slowdown in the near future.

An un-inversion of the yield curve is associated with a slower economic growth. A lot of people say an inversion is a precursor to recession. No, it’s an un-inversion.