Tags: gdp | data | investors | lawmakers

Investors, Lawmakers Obsess Over GDP as Trump 'Sugar High' Fades

gdp or gross domestic product wooden block on us dollar bank note
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Friday, 26 October 2018 09:38 AM Current | Bio | Archive

The U.S. economy grew at a robust annual rate of 3.5 percent in the July-September quarter as the strongest burst of consumer spending in nearly four years helped offset a sharp drag from trade, the Associated Press reported.

The Commerce Department said Friday that the third quarter’s gross domestic product, the country’s total output of goods and services, followed an even stronger 4.2 percent rate of growth in the second quarter. The two quarters marked the strongest consecutive quarters of growth since 2014.

For comparison, real GDP increased at an annual rate of 4.2 percent in the second quarter, according to the "third" estimate released by the Bureau of Economic Analysis.

In the first quarter, real GDP increased 2.2 percent.

One could do well keeping in mind that this GDP number will be revised many times over the course of the coming months and even years.

Nevertheless, the number will obsess investors, let alone the politicians.

The problem economists have with all of this, is that the biggest market reaction comes with the first data release, notwithstanding the first data release is the least reliable guess at what is happening.

However, the U.S. economy is probably doing OK. The sugar high of the Trump tax cut is fading in the third quarter of course, but as quiet a lot of the tax cuts were spent on imports, that change is not as dramatic of an impact on the U.S. economy as it might have been.

Whatever the early effects of tariffs may be, the nation's trade picture deteriorated noticeably in the third quarter. Country balances aren't posted with the advance report but will follow with next week's international trade report that will also include data on services.

The goods portion of September's trade deficit that was released yesterday was deeper than expected, at $76.0 billion vs expectations for $74.7 billion. This swells the 3rd monthly average to a $74.5 billion goods deficit which compares very unfavorably with the 2nd quarter's monthly average of $66.7 billion. The second quarter was a very good quarter for trade, representing 1.2 percentage points of the quarter's 4.2 percent GDP pace but yesterday's results point to an unwanted reversal for the third quarter.

The Fed and U.S. Equity Prices

Could the recent equity volatility cause a growth problem and get the Fed to change its course? It doesn’t seem so.

Yesterday, we got two Fed speakers, who are both FOMC voting members, that said the Fed won’t change its policy path because of the current volatility in equity markets.

Cleveland Fed President Loretta Mester said: “From the perspectives of the Fed’s goals of maximum employment and price stability, the U.S. economy is doing very well … Early this month, longer-term interest rates moved up, and over the past couple of weeks, volatility in equity markets has increased. While a deeper and more persistent drop in equity markets could dash confidence and lead to a significant pullback in risk-taking and spending, we are far from this scenario … While the market volatility poses a risk to the forecast and bears monitoring, it has not led me to change my modal medium-run outlook.”

Fed Vice Chairman Richard Clarida said in his first major speech: “With the economy operating as close as it has in a decade to the Federal Reserve's dual-mandate objectives of price stability and maximum employment … Even after our most recent policy decision to raise the range for the federal funds rate by 1/4 percentage point, monetary policy remains accommodative, and I believe some further gradual adjustment in the policy rate range will likely be appropriate.”

Brexit

The interminable tedious process of separating the European Union (EU) and the United Kingdom (UK) continuous by going nowhere fast.

Media reports suggest that the British government is giving up trying to negotiate for the time being only due to a lack of unity amongst members of the Cabinet.

ECB President Draghi said yesterday that private-sector banks should take adequate steps to protect themselves against the worst effects of a “no-deal Brexit” in a timely fashion. The European Central Bank President said if Brexit day looms with no deal in sight, lenders will have to start preparing for a so-called hard Brexit. While that may lead to some “financial uneasiness,” it would take “an extraordinary amount of lack of preparation” for a no-deal Brexit to trigger large financial-stability risks.

Investors could do well keeping in mind that London ranks second after New York on the “Global Financial Centres Index.”

Perhaps that Prime Minister May is the only hope.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
 

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One could do well keeping in mind that this GDP number will be revised many times over the course of the coming months and even years.
gdp, data, investors, lawmakers
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2018-38-26
Friday, 26 October 2018 09:38 AM
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