Q4 2022 GDP Turns Positive But Both Long-Term Leading Components Remain Negative

– by a New Deal Democrat

Here is my final note for this morning.

Real GDP for the fourth quarter reached +0.7%, or +2.8% on an annual basis. Although this is lower than most quarters over the past few years, as shown below:

Although not shown (due to the huge fluctuations of the pandemic), it would be slightly above the average for each quarter in the 10 years preceding the pandemic.

But as usual, my focus is on the two long-standing leading components of the GDP report: income to owners, a proxy for corporate profits, and private residential investment (housing) as a share of GDP.

And most importantly, both were negative.

Ownership income (blue in the chart below), a proxy for corporate earnings (red), which won’t be reported for another two months, rose +3.2% in nominal terms. The “official” leading metric uses unit labor costs as a deflator, which we also don’t know yet, so I substituted the implicit GDP deflator as a workaround:

Deflated, they were down -0.4% for the quarter and down -4.0% since their peak in Q2 2021. Employers making less profit are starting to cut hours and jobs, or at least the hiring. In other words, it portends further weakening of the labor market in the future.

Second, real private housing investment as a share of GDP is a long-standing leading indicator popularized more than 15 years ago by Prof. Edward Leamer. It tends to decline for 6-7 quarters before a recession occurs. It’s even slightly better when calculated against real inflation. Not surprisingly, in the fourth quarter of last year it took another bad hit:

This metric has been screaming “recession!” for several quarters now; just remember that supply constraints mean that housing units under construction hit an all-time high last month, as reported in last week’s December monthly update.

This adds even more evidence to the claim that there will be a recession this year.

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