Trump says GDP 'knocking it out of the park'. Is it?

Monday, 29th April 2019 06:58 - by Shant

Friday's release of Q1 GDP was the headline event risk in the financial markets this week, and after some strong inputs had been reported in recent weeks, banks and economists revised up their expectations from sub 2.0% levels seen a month or so back.  As a consequence, expectations on the headline were in the 2.0-2.5% region, but at 3.2%, even the better performing Atlanta GDP model was beaten after lifting its forecast up to 2.8% recently.  The number prompted a fist-pump from the US president, who is not shy in lauding success, quoted saying that 'we're knocking it out of the park'.  

The president may also get his wish of lower interest rates off the back of the core PCE measure which slumped from 1.8% to just 0.9%.  This is the preferred inflation measure of the Federal Reserve and in response to the Q1 drop, the futures markets raised the odds of a rate cut at the end of the year.  So, was the growth data as strong as the headline suggested? Let's take a look.

Looking at the table of contributions, there was a heavy input from the trade figures which added just over 1% from net exports comprised primarily of goods.  Given the outlook for global trade going forward, this puts a lot of emphasis on maintaining this dynamic which has been rather unfavourable to more export-reliant regions such as Europe, so we can at least expect to less support from this sector in future months and quarters unless there is a material pick up in demand globally.  If one believes this could materialise as a function of some of the more positive news out of China say, then we would also expect to see some improvements in Germany and Japan, where trade has been a material detractor as I have already stated.  If this were the case, however, we perhaps would not have seen the Fed taking a breather on its tightening cycle, which as we now know has been based on external growth (and demand) concerns as much as anything else - if not more so. 

The other major contributor to growth was inventory, with ongoing fears over tariffs maintaining a process of stockpiling which bloats the balance sheet through a build-up of stock as well as 'forward spending' at a time when margins are reportedly being squeezed.  The latter point suggests the world order is being hit by high competition, which fits into the argument that global trade is tight and set to remain that way at the very least, so the US economy will need to derive strong support from internal demand if output is to be maintained.  That said, personal consumption rose by 1.2%, which was pretty much as expected, though down from consumption of 2.5% in Q4.  It was worth noting that final domestic demand was the slowest seen since 2013.

This puts the emphasis back on jobs and wage growth.  With unemployment at long term lows, the tight labour market is a million miles away from being a problem in the current environment, but what is important for future consumption was higher income levels. As I have spoken of before, current levels of job growth should have perhaps led to comparative gains in earnings, but this has not necessarily the case.  Contained inflation levels could be part of the answer and on this point, Q1 core PCE has dipped back to 1.3% after a 1.7% showing in the previous quarter.  The implications for the Fed are clear - their decision to sit it out on the sidelines are and have been vindicated and there is little reason to move on rates at the present time.  After Friday's numbers were digested, we saw odds for a rate cut at the end of the year increased slightly, though, at this stage, that may look a little premature. 

So as we can see, there are many questions left unanswered from this data, and as good as it first looked, the dynamic Dollar was quick to rein in the initial response to the numbers.  Stocks offered few signs as a market gauge, though as I have already spoken of, the rate outlook is currently the stronger driver - strong that is until the dynamics of the real economy start to kick in.  US jobs data next week should take on a more influential role if we are to tie it in with the early growth figures for the year. 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.