The Trump Economy has Traction, is Gaining Momentum
Last week’s Q-4 GDP report showed a gainer of 2.6% (SAAR), following gains of 3.2% and 3.1% the prior 2 Quarters, which was the 1st time in 3 years that GDP posted 2 consecutive Quarters of 3.0%+ growth.
Note: Nothing close to that ever happened in the 8 years of the Hussein Obama Admin, and recent history suggests that number will likely be revised higher.
The Atlanta Fed’s GDPNow forecasting model had 3.4% for Q-4 the day before the official number was released. Meanwhile, this forecasting model’s handlers have moved on to Q-1 Y 2018 with a jaw-dropping gainer of 4.2%.
That would be quite a change from the pattern of weak Q-1 GDP growth rates reported since Y 2010.
To eliminate this seasonal distortion in the seasonally adjusted data, some observers track the yearly percentage change in real GDP. This growth rate has been hovering around 2.0% since Y 2010.
Pessimistic economists warn that this rate had been the economy’s “stall speed,” always preceding recessions. They were wrong, the economy continued to cruise at the stall speed without stalling.
Notwithstanding the strength of the last 3 Quarters of Y 2017, real GDP remained near this speed, clocking in at 2.5% during the 4 Quarters through the end of the year.
If President Trump’s tax cuts boost economic growth to say 3.0% per Quarter this year, then the Y-Y growth rate for Y 2018 would be 3.0%.
While the GDPNow model is starting the year bucking the Q-1 curse, the same cannot be said for the daily Citigroup Economic Surprise Index (CESI), which has been surprisingly predictable since Y 2010.
The Big Q: Why is that?
The Big A: That is because it is still tracking the Q-1 curse closely.
It most recently peaked at 84.5 on December 22, and fell to a 1/29 reading of 35.5. The CESI is highly correlated with the 13-week change in the 10-year US Treasury bond yield. This suggests that some of the upward pressure on the bond yield might dissipate in here and continue for some time.
Capital Spending Rebounding: The energy-led growth recession during 2-H of Y 2014 through early Y 2016 was most visible in capital spending. This component of real GDP rose just 0.4% from Q-3 Y 2014 through Q-4 Y 2016. Since then through Q-4 Y 2017, it is up 6.3%. This may be partly attributable to the strong spirit brought about by President Trump’s election. There is a good correlation between the CEO Outlook Index compiled by the Business Roundtable and the Y-Y growth rate in real capital spending. Both rebounded simultaneously in Y 2017. Also contributing to the rebound in capital spending was that the energy sector had stopped slashing such spending at the end of Y 2016 and increased it as Crude Oil prices recovered.
The news is full of articles about the sad state of America’s infrastructure, but there is less talk claiming that US corporations are not spending enough on their plant and equipment to remain competitive in global markets. And that is because the data suggest that notion has been wrong all along, and particularly now.
So, let us have a close look at which sectors are driving capital spending, as follows:
- Equipment: Capital spending on equipment in real GDP stalled during Y’s 2015 and 2016, but rose to a new record high during Q4-2017. Leading the way higher through thick and thin has been information processing equipment, which soared 9.7% Y-Y last year to a new record high. Interestingly, it has been setting new record highs consistently during the current expansion despite the flat trend in capital spending on computers. This flat trend must be due to the cloud, which allows companies to rent the computing and storage services they need from cloud providers, which are able to operate servers much more productively than their customers ever could.
- Equipment: Industrial and transportation. Capital outlays on industrial equipment in real GDP rebounded sharply during 2010-2012 from the previous recession. Such spending stalled near the previous cyclical high through 2016. It soared during Y 2017, rising 7.4% Y-Y through Q-4 to a new record high. Spending on transportation equipment also soared coming out of the previous recession. And, it has continued to do so since, rising into record territory from Q-4 Y 2012 through Q-3 Y2015. Then it dipped during the energy-led growth recession, and has been slowly recovering since 2-H of Y 2017.
- Software and R&D. Software spending in real capital spending has been soaring in lock-step with IT equipment to record highs. Lagging behind, but still managing to climb into record territory, is spending on R&D.
- Far less awe inspiring is capital spending on structures. It remains below the 2 previous cyclical peaks. That seems to support the notion that companies aren’t spending enough on their infrastructure. More likely is that they are using more industrial and information processing equipment more productively in refurbished facilities.
Inflation Remains Subdued.
The Quarterly GDP price deflators don’t get as much press as do the monthly CPI and PCED. The Quarterly inflation data are largely determined by the monthly inflation indicators, which focus on consumer inflation rather than economy-wide inflation. Of course, since the consumer accounts for so much of GDP, consumer inflation has a big weight in the GDP deflator.
The bottom line on the broadest inflation measure for our economy is that inflation remains subdued at 1.9% (Y-Y through Q-4) for the overall GDP deflator .
Excluding food and energy, the figure is 1.8%. The PCED in the quarterly GDP shows inflation of 1.7% total and 1.5% core. The market-based core PCED inflation rate was notably subdued at 1.2% last year.
The Trump Policy: America First
The Trump Mission: MAGA