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Looking Under GDP's Hood: Trump Economy Is Good, Getting Better

Looking Under GDP's Hood: Trump Economy Is Good, Getting Better
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Wednesday, 31 January 2018 07:56 AM Current | Bio | Archive

GDP I: Still Cruising, Not Speeding.

Last week’s Q4 GDP report showed a gain of 2.6% (saar), following gains of 3.2% and 3.1% the prior two quarters—which was the first time in three years that GDP posted two consecutive quarters of 3.0%-plus growth.

Debbie notes that “recent history suggests it will likely be revised higher.”

The Atlanta Fed’s GDPNow forecasting model had 3.4% for Q4 the day before the official number was released. Meanwhile, this forecasting model’s handlers have moved on to Q1-2018 with a jaw-dropping gain of 4.2%.

That would be quite a change from the pattern of weak Q1 GDP growth rates reported since 2010, as we noted previously (Fig. 1).

To eliminate this seasonal distortion in the seasonally adjusted data, Debbie and I prefer to track the yearly percentage change in real GDP (Fig. 2). This growth rate has been hovering around 2.0% since 2010.

A few years ago, pessimistically inclined economists warned that in the past this rate had been the economy’s “stall speed,” always preceding recessions. Instead, the economy continued to cruise at the stall speed without stalling.

Notwithstanding the strength of the last three quarters of 2017, real GDP remained near this speed, clocking in at 2.5% during the four quarters through the end of the year. If Trump’s tax cuts boost economic growth to let’s say 3.0% per quarter this year, then the y/y growth rate for 2018 would be 3.0%.

While the GDPNow model is starting the year bucking the Q1 curse, the same cannot be said for the daily Citigroup Economic Surprise Index (CESI), which has been surprisingly predictable since 2010 (Fig. 3). That’s because it is still tracking the Q1 curse closely. It most recently peaked at 84.5 on December 22, and fell to a 1/29 reading of 35.5. By the way, the CESI is highly correlated with the 13-week change in the 10-year US Treasury bond yield (Fig. 4). This suggests that some of the upward pressure on the bond yield might dissipate for a while.

GDP II: Capital Spending Rebounding. The energy-led growth recession during the second half of 2014 through early 2016 was most visible in capital spending. This component of real GDP rose just 0.4% from Q3-2014 through Q4-2016 (Fig. 5). Since then through Q4-2017, it is up 6.3%. This may be partly attributable to the animal spirits unleashed by 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 (Fig. 6). Both rebounded simultaneously last year. Also contributing to the rebound in capital spending was that the energy sector had stopped slashing such spending at the end of 2016 and increased it as oil prices recovered (Fig. 7).

While the news is still full of articles about the sad state of America’s infrastructure, now there is much less chatter claiming that US corporations aren’t spending enough on their plant and equipment to remain competitive in global markets. That’s because the data suggest that notion has been wrong all along, and particularly now.

Let’s have a closer look at which sectors are driving capital spending:

(1) Equipment: IT. Capital spending on equipment in real GDP stalled during 2015 and 2016, but rose to a new record high during Q4-2017 (Fig. 8). 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 (Fig. 9). Interestingly, it has been setting new record highs consistently during the current expansion despite the flat trend in capital spending on computers (Fig. 10). 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.

(2) Equipment: Industrial and transportation. Capital outlays on industrial equipment in real GDP rebounded sharply during 2010-2012 from the previous recession (Fig. 11). Such spending stalled near the previous cyclical high through 2016. It soared during 2017, rising 7.4% y/y through Q4 to a new record high.

Spending on transportation equipment also soared coming out of the previous recession (Fig. 12). However, it has continued to do so since, rising into record territory from Q4-2012 through Q3-2015. Then it dipped during the energy-led growth recession, and has been slowly recovering since the second half of 2017.

(3) Software and R&D. Software spending in real capital spending has been soaring in lock-step with IT equipment to record highs (Fig. 13). Lagging behind, but still managing to climb into record territory, is spending on R&D.

(4) Structures. Far less awe inspiring is capital spending on structures (Fig. 14). It remains below the two 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.

GDP III: Inflation Remains Subdued. The quarterly GDP price deflators don’t get as much press as do the monthly CPI and PCED. Nevertheless, Debbie and I glance at the quarterly inflation data, though they 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 Q4) for the overall GDP deflator (Fig. 15). 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 (Fig. 16). The market-based core PCED inflation rate was notably subdued at 1.2% last year.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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EdwardYardeni
A few years ago, pessimistically inclined economists warned that in the past a 2 percent growth rate had been the economy’s “stall speed,” always preceding recessions. Instead, the economy continued to cruise at the stall speed without stalling.
gdp, trump, economy, growth
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2018-56-31
Wednesday, 31 January 2018 07:56 AM
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