April 26, 2019: Weekly Forecasting Update
Today: U.S. Bureau of Economic Analysis: Gross Domestic Product Release: "Real gross domestic product (GDP) increased 3.2 percent in the first quarter of 2019, according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2018, real GDP increased 2.2 percent...
Key Points:
The right response to almost all economic data releases is: Nothing has changed—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways. Specifically, it is still the case that:
- The Trump-McConnell-Ryan tax cut, to the extent that it was supposed to boost the American economy by boosting the supply side through increased investment in America, has been a complete failure.
- The Trump-McConnell-Ryan tax cut, to the extent that it was supposed to make America more unequal, has succeeded.
- The Trump-McConnell-Ryan tax cut delivered a substantial short-erm demand-side fiscal stimulus to growth that has now ebbed.
- (A 3.2%/year rate of growth of final sales to domestic purchasers over the seven quarters starting in January 2017, pushing the level of Gross National Income up by 2.1% from this demand-side stimulus.)
- U.S. potential economic growth continues to be around 2%/year.
- There are still no signs the U.S. has entered that phase of the recovery in which inflation is accelerating.
- There are still no signs of interest rate normalization: secular stagnation continues to reign.
- There are still no signs the the U.S. is at "overfull employment" in any meaningful sense.
- A change from 3 months ago: The Federal Reserve is now supporting the recovery rather than focusing on policies that are likely to keep PCE chain inflation at 2%/year or lower.
- A change from 1 month ago: The Federal Reserve's abandonment of its focus on policies that are likely to keep PCE chain inflation at 2%/year or lower does not mean that it is preparing to do anything to avoid or moderate the next recession.
- A change from 1 week ago: The U.S. grew at 3.2%/year in the first quarter of 2019—1.6%-points higher than had been nowcast.
- But the growth number you want to put in your head in assessing the strength of the economy is the 1.6%/year number that had been nowcast.
- The U.S. grew faster than had been nowcast by borrowing 1%-point of growth from the future via what is likely to turn out to be noise in net exports—thus a borrowing highly likely to be reversed.
- The U.S. grew faster than had been nowcast by investing heavily in inventories, which contributed 0.6%-point of growth.
- This inventory investment may or may not be reversed: it may be a reaction to the economic and political-economic uncertainty created by Trump-as-chaos-monkey, and a resulting unwillingness of companies to run their value chains as lean as they used to.
- If so, then while this inventory investment raises measured growth, it actually reflects a subtraction from American economic welfare.
Key Numbers to Look at:
- The headline quarterly GDP growth number: 3.2%/year
- The gap between growth in overall investment—5.1%/year—and fixed investment—1.5%/year. That gap is the large jump in inventories.
- The steep fall in imports—growth at -4.4%/year. Together with normal exports, this means that international trade contributed strongly to growth in the first quarter. This is probably a random and meaningless statistical fluctuation.
- A large 3.9%/year jump in state and local government spending, again probably a random and meaningless statistical fluctuation.
- A perhaps less noisy measure of growth in demand: the 2.5%/year rate of growth of final sales of domestically-produced goods and services.
- Probably the best measure of growth in the first quarter: the 1.4%/year rate of growth of final sales to domestic purchasers.
#highlighted #macro #forecasting
