Another look at the great GDP print
Not that the economy really matters to the stock market, but the initial print for the 1st quarter showed a shocking 3.2% growth. This is shocking because 6 weeks ago the estimates were under 1% and the recent guesses were much lower.
But 3.2% is just the headline print with revisions to come.
When we digged into the numbers we found where the shock factor came from. Consider the following first:
1) If they used CPI-U instead of GDP deflator for inflation, GDP would have been around 1.5%, or
2) If you leave out significant inventory building and import/export adjustments then GDP would have been only 1%, or
3) If you only look at Personal Consumption and business investments then GDP was 1.1% and state/local govt added .3% more than normal which equals 1.4% growth.
So maybe the New York Fed’s Nowcast 1.43% estimate was not so far off after all and the real questions are what really happened in the inventory and import/export sections.
I think the bottom line is consumer spending which makes up the bulk of the GDP model was down and business investment was down. And large inventory building is never a good sign and points to weaker growth in the out quarters. Lower imports add to the GDP print, but if this is due to slower consumer spending what does that tell us.
But hey, we got that great 3.2% GDP headline. And the markets may not like it. Why?
Because in the new financialized economy, the markets want lower interest rates which they have already priced in for later in the year. And in the new economy, bad economic news is good market news. And 3.2% does not sound bad enough.
We can not have people thinking the economy is strong. Can you imagine…
“We are cutting interest rates and stimulating the economy because unemployment claims are at 50 year lows, inflation is running over 2%, and the economy is booming.” It does not work.
So someone at the Fed has to come out and talk this down pronto.
The Details
(Scroll to the bottom for the bottom line)
The model used a very low GDP inflation rate which is different from CPI-U consumers experience. If they used the CPI-U number then real GDP would have been sub-2%. A significant difference. But let’s assume the GDP deflator was accurate and go with their numbers.
To do this we need a good frame of reference. I chose the last 3 years, and the last three first quarter of the year.
What we find is that inventory building, and import/export adjustments added 2.2% to GDP in the first quarter of 2019 over the 3 year averages. If these items had come in at their average, then GDP would have been 1%. And this low number is due to personal consumption coming in much lower than the average and the last 3 first quarters.
Here is where the 1st quarter deviated.
Personal Consumption which makes up 70% of the GDP model was 1% lower than the 2016-18 average and .25% lower than the last 3 first quarter. So consumer spending is DOWN!
Business investment for future production was 0.4% lower than 2016-18 and 0.8% lower than the last 3 first quarters. Business are not investing to grow the US economy. But… but… but the tax cuts were suppose to grow the economy.
Inventory “investments” are up .8% from 2016-18 averages and up over 1% from the last 3 first quarter averages. If businesses can not sell stuff and inventories are building, this jives with lower consumer spending and this will hit GDP later in the year.
Import/Export adjustments were substantial and probably where estimates missed the most. Combined they were 1% higher than the 3 year average and 1.25% higher than the last 3 first quarter averages. Take this adjustment out and the estimates were close.
There could be some shifting in trade due to Trump’s policies and this would explain diving global trade too. Not good for the global economy.
We also saw state and local govt add 0.3% to both averages in the first quarter.
Bottom line
At first blush, 3.2% looks like a great headline GDP number. Dig a little and it raises a lot of questions. And I don’t think all the answers will be a good.
But again, the stock market has not cared about the economy in a long time.
The markets only care that interest rates remain low and the Fed is there to provide them another fix if needed. And the Fed has told the world, no more interest rates hikes until the election and they are standing by the money spigots if needed (for the financial markets, not you).
So don’t invest based on the economy and the economic models. Speculate in the markets if you must but only as long as you think the central bank can keep propping up their bubbles.
Invest safe and invest smart,
Michael Bond
Categories: Perspectives, TSP Charts