Ancient GDP History and the Return to Normalcy

US GDP figures for the past several years got a revision Thursday morning, showing output rebounded from COVID lockdowns faster than previously estimated. Early 2022’s contraction also turned out to be not so bad, with a smaller-than-estimated decline in Q1 and now growth in Q2. Several first-quarter results also got a lift, suggesting statisticians are still wrangling with their infamous seasonal adjustment difficulties. Our main takeaway, though? Economic activity lately looks pretty darned normal, something we can see even better when we look under the hood. None of this is new for stocks, but it helps show the lingering gap between reality and sentiment.

These revised data remind us that something very strange, truly unprecedented, happened in 2020: Governments forced people to stay home and, for the most part, out of the office or even off the job. This disrupted everyday patterns in ways both obvious and less obvious. The obvious: GDP tanked during lockdowns, then rebounded sharply once they ended. But the rebound didn’t mean business as usual. Even though people were allowed out and stores were open, a lot of services weren’t, and people were still spending a lot of time at home.

So when spending rebounded, a lot of it went to physical goods and much of that to durable goods. People bought barbeque equipment and other culinary tools to make up for not going out. Sporting equipment to fill the long afternoons. Office accoutrements to make working from home more comfortable. Hair and beauty gadgets to fill the void before salons opened. Outdoor furniture. Camping equipment. Anything they thought would help give the home a nice zzhizzh. As a country, we filled the services void with stuff. Meanwhile, when services restrictions eased, society made up for lost time at all their favorite restaurants, bars and sporting events.

By mid 2021, this goods boom was fading. The high of reopening gave way to more normal services consumption habits. Goods consumption also flattened. Stores erred in thinking pandemic-era buying was the new normal and over-ordered everything Americans gorged on during lockdowns, leaving them with gluts to work through and driving huge swings in inventories, which added to volatility in GDP during 2021 and 2022. Factories were slow to make the things we all did want, like cars, because it turned out to be much harder to rev production back up than shut it off. But the earlier boom also pulled forward demand for many other items. Because more economic data—and especially the series media touts most—feature manufacturing despite its small share of GDP, it helped fuel 2022’s great recession freakout and the sour sentiment that fueled stocks’ shallow bear market, keeping a lid on consumption.

When animal spirits started reviving in 2023, most of the resurgent demand went to services, not goods. Travel and tourism were returning. Taylor Swift embarked on a huge tour. Goods spending mounted a tepid recovery, but services won the day as society continued working off the hangover from 2021’s binge on stuff.

Exhibit 1: The Great Goods and Services Divide

Source: US BEA, as of 9/26/2024. Real personal consumption expenditures on goods and services, Q4 2019 – Q2 2024.

This divide filtered through other data, including purchasing managers’ indexes, which have shown growing services and weak manufacturing for a couple of years now. Industrial production, too, has been meh since 2022. Ditto durable and core capital goods orders, a leading indicator of investment in equipment. Headlines continued to cast this industrial weakness as a recession warning sign, forgetting what we had just lived through and the disruptions it caused. But to us, it was all just part of the long slog back to normal. Which seems to be close to where we are now, with services and goods growing.

The last leg in this return is the one people continue misinterpreting: Employment. Alleged labor market “weakness”—which is really just new entrants and returnees joining the labor force a smidge faster than businesses can absorb them—is a sign of a teetering economy in need of more rate cuts, we are told. Even the Fed plays into this, saying they cut last week to prevent the jobs market from weakening further. But when you remember that labor markets are a late-lagging indicator, then it becomes easier to see these wobbles as a trailing indicator of the bust, boom and volatile, uneven return to more normal trends that marked the past four and a half years.

Recency bias being what it is, people look at monthly payroll gains in the 100,000s, compare them to the 200,000 and 300,000 figures that marked the initial lockdown recovery, and call hiring slow. But this year’s average monthly private payroll growth is 151,500 jobs.^[i] The average during the previous economic expansion? Not far off, at 163,800.^[ii] Seems to us everyone is mistaking normal for weak.

For stocks, this is all backward-looking. But it does suggest economic conditions aren’t actually weak. They are normal, while sentiment isn’t. And sentiment seems stuck to the downside, indicating some wall of worry persists on the economic front. Economics are just one market driver, and this is not a 2025 forecast. But it does show that as we wend toward the holidays, things look—perhaps surprisingly, to many—fine.