Serious Economic Headwinds Coming

The seeds are sown for a return to a deflationary output gap in the year ahead

Highlights

• The Fed has tightened more than people realize, by the equivalent of +730 basis points when adjusting for the effects of QT 

• Autos poised to drag on GDP growth — if not for the pre-strike surge in auto activity, real GDP growth in Q2 would have been +1.7% at an annual rate, not +2.1% 

• The gap in real personal income and real consumer spending has been bridged by the savings flow drawdown. Without this, real GDP will be running at below-potential growth of 1.5% 

• There has been no spread from the spike in WTI crude prices to the broader commodity market — perhaps why inflation breakevens have been well contained