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March 16, 2018
Is something broken?
As the low volatility stock market run-up, from mid-2016 through January 2018, comes to an end, and starts to sink into investors' minds, investors have reason to feel like something is broken. Reported automobile sales and retail sales this week came in weaker than expected. Mortgage refinancing plunged to a decade low. The tariff business is getting heated. President Trump's former chief economic advisor, Gary Cohn, is already "Gary Who?" and Secretary of State Rex Tillerson has been relieved of his duties. Bitcoin is trading below its cost of mining. The mergers and acquisitions space caught a chill via AT&T/Time Warner deal running into regulatory resistance and the Broadcom/QUALCOMM deal getting blocked. And to top it all off, Toys R Us is shuttering, which will add a sizable chunk of vacant retail space to the ongoing retail apocalypse. Doesn't anyone remember that last Friday's February Government employment report sent the Dow Jones Industrial Average soaring 440 points because wages were less than expected? It was an unexpected rise in wages, reported by the Government on February 2nd, that sparked the stock market selloff last month.
OK, I know I'm cherry picking my stats. But just so I don't get bogged down too much in information bias, there are positive headlines too; a massive jump in stock buybacks, courtesy of the tax law that was passed last December, corporate earnings continue to come in stronger than expected, the labor market is healthy, consumer confidence is high, and investors added a record amount of money to U.S. stock funds over the past week (but they did withdraw a near-record amount a few weeks before). Ultimately, it's hard to envision a slowdown in global economic growth on the horizon anytime soon. Unless we get into a trade war with China, that is. That could happen, but the current betting on Wall Street is that it'll be avoided.
If only there was a way to pinpoint a running summary of available economic statistics that could make sense of it all in just one statistic; one that could provide us with an up to the minute estimate for real U.S. GDP growth. Well, I'm happy to tell you there is one.
The
GDPNow figure, via the Federal Reserve Bank of Atlanta, provides a running estimate of real GDP growth based on available data for the current measured quarter. I'll provide the link below so you can follow along going forward. An observation I'd like to make is that the stats in the front of the quarter have enormous s
way over the GDPNow estimate because the data set is limited to just one or two stats. If the first stat of the quarter is strong, then the GDPNow will reflect that strong figure. As the quarter goes by and more stats are input into the model, the more it moderates. If the GDPNow starts the quarter with a high number and sinks into the end of the quarter, then stats are coming in weaker, which may indicate the economy is weakening.
What got me thinking about this is an article by Jeff Cox at CNBC (@JeffCoxCNBCcom). From his article, March 12th:
"The Federal Reserve Bank of Atlanta has had to walk back, in a big way, its headline-making forecast that the first quarter would feature eye-popping economic growth.
Where back in late January the central bank district was calling for a 5.4 percent GDP gain, it released a reading Wednesday for its widely followed GDPNow tracker that slashed that projection all the way down to 1.9 percent."
I don't think anyone took the above 5.4% estimate in the beginning of the quarter too seriously, but going below 2%, after nearly a full quarter's worth of stats, definitely catches the attention of investors who observe it. It certainly caught my attention.
The GDPNow figure was updated this morning. I would have expected it to increase due to a higher than expected rise in U.S. industrial production and manufacturing output, both released this morning. But the current estimate for real GDP went down from 1.9% to 1.8% because of downward revisions to consumer spending, net exports, and inventory.
Watch this one minute video of GDPNow inventor, economist Patrick Higgins, explain what this is.
My conclusion: 2016 and 2017 both started with a fairly weak first quarter, but both years showed improvement in GDP as they went on. Maybe this year is just a three-peat. Or, maybe the ever elusive black swan, something unforeseen, that ends this bull market is that the economy is just running out of steam and it's too obvious to see it. For now, the betting is that GDP will accelerate as 2018 goes on. We'll see soon enough.
Links:
GDPNow - Federal Reserve Bank of Atlanta
All that optimism for hot first quarter economic growth is rapidly fading away
Mitch
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