Bob is correct!

The economy maintained positive nominal growth while money supply was contracting because velocity increased.

However, I don't think you should expect the same situation to continue going forward.

Here's why...

1/

https://twitter.com/BobEUnlimited/status/1688533662340440066

We know from the work of Dr. Lacy Hunt that velocity is heavily influenced by the Loan-To-Deposit ratio.

There are other factors, but the LD ratio is a huge driver.

So saying velocity has been increasing is like saying the Loan-to-Deposit ratio went up.

2/

Is the housing bubble deflating?

The average new home is selling for 8.3x average disposable income.

This is down from a record of almost 10x!

1/5 But...

The average existing home is trading for 7x average disposable income, nearly at record highs and way above the long-term average.

2/5

Residential Construction 🏘️

Employment and output in the residential construction sector has cooled from a near-record 16% annualized growth rate to a mild contraction.

The hard or soft landing question will largely come down to where this index goes from here.

1/4 Activity in the residential construction sector exploded in 2020/2021 and flattened out at peak levels almost immediately after monetary tightening began.

2/4

Despite the narratives created by market momentum, Aggregate Economic Activity continues to cool (slowly).

After the retail sales and industrial production data, the most objective measure of real growth shows just a 1.0% trend.

1/ On a six-month basis, inflation has declined to 3.1%.

So our Nominal Coincident Index is showing a 4.1% growth rate as of June.

This is the lowest nominal growth rate of the cycle and below the 10YR average of 4.4%.

Nominal growth is no longer above trend.

2/

It's been roughly 4 months since the regional banking crisis started with the failure of SVB in March.

Let's review the core issues facing the banking system, how banks are responding, and what it means for the economy ⤵️

1/ Banks extend credit to the economy in the form of buying securities and making loans.

The economy operates on credit expansion which is why it’s very rare to see bank credit contract.

2/

The ISM Manufacturing Report is more consistent with a hard landing vs. a soft landing.

Here are two more charts that show why.

1/4

https://twitter.com/EPBResearch/status/1675883885056368641

Duration.

The New Orders Index has contracted for 10 consecutive months. A key element of recessionary periods is duration.

The soft landings of 1967, 1985, 1995, and 2016 did not have the same duration of contraction in demand (new orders).

2/4

The reason I focus so much on the "sequence" of the cycle is because it's the one thing that remains the same across time.

It's what gives the cycle its rhythm.

1/ If we look at real GDP, we can break it into three major buckets:

- Cyclical GDP
- Total GDP (Final Sales)
- Non-Cyclical GDP

In every recession, it goes red line, blue line, black line...

2/

Here are a few charts on the labor market using my composite index and business cycle approach.

1/

https://twitter.com/BobEUnlimited/status/1665386769037008907

We first have to define the target or our best reading of the labor market.

Should we use the unemployment rate, the household survey, the establishment survey, or what?

Perhaps all...

My Coincident Employment Index aggregates five of these labor market metrics.

2/

The US economy may already be in a recession, based on the NBER business cycle dating process.

Let's take a look at the NBER recession dating process and what it's telling us now ⤵️

1/ A recession in the United States is not defined by two negative quarters of GDP.

The National Bureau of Economic Research has never used that "rule-of-thumb" as the official definition.

This is the real definition:

2/

Where is the recession?

Is it taking longer than normal?

Is it still coming?

Let's take a look at the historical leads & lags of the Leading Economy, Cyclical Economy and Total Economy...👇

1/ The economy follows a repeatable sequence that has held true across nearly every economic cycle over the last 50 years.

The current economic cycle is following the same pattern, but the lead time of traditional recession warnings has reached historic extremes.

Let's see...

2/

A lot of people are saying that we can't have a recession because "real income is too strong."

Here's why that's wrong...

1/5 Real personal income less transfer payments, the income measure used by the NBER, is currently growing at a 2.2% annualized rate.

The growth rate has increased as inflation has cooled and since income is +2%...no recession, right?

2/5

The labor market remains tight, they say.

The data say something else.

Remember that NFP payroll growth was negative ahead of recessions zero times.

Zero.

1/3 The forward-looking labor data is clear-cut recessionary.

2/3

Service-providing jobs are 83% of total jobs.

Construction & manufacturing jobs are just 13% of total jobs.

Which is more important, service jobs or cyclical jobs?

Let's find out 👇

1/ Construction & manufacturing jobs have declined from almost 40% of total employment to 13% today.

So it's true that the economy has become less cyclical.

2/

The consumer remains under pressure, based on recent retail sales data.

Total retail sales growth cooled to +2.0% in March.

1/4 It’s important to remember that retail sales is reported in nominal dollars.

After adjusting for inflation, real retail sales are declining at a 1.9% annualized pace, a level of growth consistent with past recessionary periods.

2/4

What happened in August 2022?

An update on residential construction spending and a question for the multi-family property developers 👇

1/7 Total residential construction spending is an extremely important part of the economic cycle.

Since May 2022, residential construction spending is down 10%.

Some of this is material cost, some of it real production.

2/7

The Silicon Valley Bank failure brought the health of the US banking sector into question.

Large and small banks are very different in the US, especially after the 2008 crisis.

Here are some of the differences and problem areas for small US banks 👇

1/ Large banks hold 38% cash and securities as a % of total assets.

Small banks hold 29% cash and securities.

This is essentially reserves, Treasuries and MBS.

2/

In the week ending March 15th, other deposits at all domestically chartered banks declined by $60 billion.

Other deposit liabilities "ODL" strips out large-time deposits and money market funds.

1/5 Other deposits at large banks increased by $65 billion, while other deposits at small banks declined by $125 billion.

Over the last 12 weeks, other deposits at small banks contracted at an unprecedented 16.4% annualized pace.

2/5

Construction employment has (so far) saved the economy from recession.

This thread explains why this happened, why it won’t last much longer, and how this extra lag increased the risk of a hard landing.

1/ Construction employment is a major driver of recessions.

Construction employment usually moves first, and it's highly volatile.

You must add other sectors (like manufacturing) for a complete analysis, but construction employment is a critical cycle to follow.

2/

The momentum in the residential housing market is the most important cycle for the economy.

Even though it's so important, it's often misunderstood.

Here are 3 charts that explain the housing market in 2023 👇

1/9 When we talk about housing's impact on the economy, we are referring to the level of construction activity.

The total level of construction spending on all residential structures peaked in May 2022 and has declined by about 9%.

2/9

I agree with Elon Musk.

Population decline is a massive risk for the global economy.

Here are 5 charts that explain why...👇

https://twitter.com/elonmusk/status/1483484932961972227

1)

Across the US, China, Japan, and Europe, there will be a 16% decline in the working-age population by 2050.

A lot of conflicting stories about the GDP report.

The best way to analyze the GDP report is to work through the layers of cyclicality.

Let's take a look.

Here's the GDP report in a short thread.

1/ Real GDP growth accelerated in Q4.

As a note, all my charts plot the two-quarter growth rate.

Quarterly fluctuations are too noisy, and we want to capture the "trend."

So the economy is accelerating, right?

2/