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Holding to Our Forecast

May 13, 2022

There is still a lot of speculation over a possible recession coming. After reviewing the data, we are holding to our forecast that there won’t be a recession. See why ITR Economics is forecasting a “soft landing” as opposed to a recession phase with our newest TrendsTalk episode with ITR President Alan Beaulieu.




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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hello, everyone. I'm Alan Beaulieu and this is another episode of TrendsTalk. Glad you could join me and as I'll be talking about some items that are in the news, and I think dive a little deeper so that you can get a better picture of what's going on. As you know, a lot of folks are talking about the R word. That's right, recession. And we've been doing a lot of work on it, seeing whether we need to revise our forecast. Because after all, every forecast that needs to be checked out regularly and make sure that's still on target. At this juncture, we've decided to hold with our forecast, which those of you that follow ITR really know that we've been talking for very noticeable slowdown in economic growth in 2022, but we did not have a recession built in.

We have a very flat first half of 2023, but again, no recession there. Now, we've looked at a lot of things to come to this determination. We've looked at real disposable personal income on a per capita basis, wages, inflation, interest rates, gasoline and oil prices, deflated retail sales, deflated new orders for capital goods, excluding aircraft. We've looked at inventories, government spending, and we've looked at the trade imbalance, the trade deficit. And as we've done all of that, we've come away with this is going to be hairy, it'll be close. But if we have a recession, it'll be a technical one, and that's where I want to concentrate for just a moment with you. Sometimes people hear the R word and they get all frozen up inside and they start thinking how nasty it could be. And you think back to the Great Recession or other downturns, when all of a sudden your sales disappear and things like that. There's really no sign of that at the moment.

Retail sales are slowing as we thought they would, but we did not see them breaking down. The consumer's earning good money and inflation has not robbed them of all their purchasing power, as we look at disposable personal income adjusted for inflation on a per capita basis. It's a question of technical versus what's actually going on in the world. Now, the technical part comes because GDP was lowered, because the inventory levels, largely due to the automobile industry, and they go a lot lower. Not as far as I could tell. And then we're looking at the fact that the trade imbalance grew and that caused GDP to be nudged lower. As a matter of fact, it was reported that exports fell. They're using seasonally adjusted data for that, we do not. We do not like to use seasonally adjusted data, unless there is no choice. We'd rather just let the numbers speak for themselves.

So, while the trade imbalance did grow and March was a large jump in the trade imbalance with the rest of the world, there's no doubt about that. It jumped to 117 and a half billion dollars, which is record high. Some of that is on inflated prices. Prices have been moving up on imports, as well as domestically, so there's some of that involved in there. But it certainly was a big move. But while it was steeper than normal, so were 2020 and 2021 increases in March. This is not like it was a, wow, where'd that come from kind of thing. It was large, don't get me wrong, but there have been steeper. 2015, sorry, steeper February to March rise. And in through their GDP did not go down into recession.

Now, also keep in mind, it's a normal thing for us to see the trade deficit widen. There have been times when it has narrowed, certainly so, from May of 2012 to November 2013, there was a slight reduction. And then from February 2016 to October 2016, there was an even slider reduction in that eight month time period. But the norm is that the trade deficit widens. Now, why is that? It's not because exports are going down as a lot of people think, it's because we buy so much. We're a large consuming nation, both on an industrial and consumer basis. We are the world's customer, if you want to think of it that way. And our importance to the world shows up in that we buy so much to come in.

Now, there are folks who say, "Well, maybe we should just make it all here." Well, that's not possible. That's just rhetoric. It has no basis in reality, but we do have a lot of on-shoring going on. We have a lot of re-shoring, that's good news. Foreign direct investments pouring into the country, that's a really strong vote of confidence by businesses around the world. So, yes, the trade deficit was a negative on GDP, but I'm not sure it was a negative on the economy, as far as the economy you and I live in. Now, as far as those export numbers go and the decline, I don't know where they're particularly getting that from a set for probably seasonally adjusted data, because the actual number showed a record high. Our exports to the world jumped $179 billion. That was an 18.4% increase over February. It's the steepest February, March rise since 2011, it was a very healthy number. Now, that also included inflated prices, but so did the import. So, let's not quibble there.

Let's just say that, you know what? That was a good export number. The United States is a major exporting nation, too many people don't know that. We sell a lot of goods that the rest of the world wants to buy. Now, who do we sell to? Well, our number one trading partner to receive our goods is Canada, $32.4 billion in March alone. After that, it's Europe, pretty much neck and neck. Any month it could change because Europe was at $32 billion in March. And then it's Mexico at 28 and a half billion dollars. And then China is the distant fourth of 13.4 trillion, a billion, excuse me. If I said trillion, it should be billion dollars. So, it's Canada, Europe, and Mexico, grew pretty tightly into there, and then China.

Yes, we would all like it if China would buy more US made goods, absolutely. But the reality is we are selling goods around the world. Our two closest friends, north and south, are big buyers of our goods, as well it's important sources of imports into the United States. Europe is the largest source of imports into the United States. I'm not sure if you knew that or not. It's a race with China, but in March it was $48.1 billion coming in from Europe, versus 47.4 from China. But then right behind that, not very far at all, you find Canada and Mexico, each of them at $40.5 billion.

So, why am I bothering you with the numbers? Because when you look at it in aggregate, you say to yourself, "Wow, we sell a lot to Canada and Mexico. We buy a lot from Canada and Mexico. This North American economy has so much trade going on what we call in from Canada." And after 2.0 USMCA here in the United States, what we're looking at is an economy that is bright and strong in servicing each other's needs in a very real way. North and south is more important than eastern in this regard. Now, our friends in Europe are also obviously very important to this scenario as well. If we combine the two countries of Canada and Mexico, obviously larger than the number of countries that make up the European Union. And our best friends to the north and south and our friends over in Europe, they're key partners of ours and they're buying and they're selling and it's all good.

Is China important? Of course, it is. I'm not trying to say that it's not. The trade imbalance is the largest with China. Maybe we'll figure out a way to have China buy more goods. Maybe we'll figure out a way to not buy as many Chinese goods, but along the way, let's not forget the importance of Europe, Canada, and Mexico. The health of those economies matters a lot to exporters. One more thought, exports at record high, that's an important part of our economy. That means it was still going. And as that's going on and consumers are strong, and new orders are strong, B2B, B2C leads you to think of probably a good way to end this. Don't plan for a recession, plan for a slowing rate of rise, and you'll have a better budget, better cash management, and a better message for your clients, as opposed to, "Sorry, we forgot to order that." Take care, be well, talk to you soon.


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