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The Improving Economy


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The economy seems to be in a short term improvement cycle according to forecasts from GDPNow and Nowcast which show real GDP growth for second quarter 2018 are dancing around 3% - up from first quarter's 2.0%.

GDP Is Hard to Forecast Accurately

GDP is a hard animal which to predict accurately - mainly due to change in private inventory fluctuations which since 2000 effected final GDP from -3.2 points to +4.4 points. The following chart shows how much it affects GDP where the gold color line is GDP and the blue line is the contribution of inventory change.

Just to be clear what the above graph is saying - in 4Q2009 and 1Q2010 GDP growth was equal to the change in inventories.

Our View On GDP Growth

Our own economic forecast predicts 2Q2018 should be stronger than 1Q2018. Note that our economic index was designed to look at the economy at Main Street level - and was not designed to guess GDP. Still, there is reasonable correlation between our economic forecast and GDP.

Also supporting a better GDP in 2Q2018 is the Chicago Fed National Activity Index which is a broad coincident index of the USA economy. It is issued 2 months in advance of GDP - and currently is in a long term uptrend. Trends continue until they do not.

The CFNAI latest data only is through May 2018 so one can only rely on the long term trend.

Sitting Back and Thinking About Economic Growth

In any event, there is NO dynamic which will have a noticeable affect on GDP at Main Street level. The economy is in a weird place where:

  • real median wage growth is just treading water;
  • real median household income is increasing (because more people in a household can find employment);
  • and the upper quartile of income earners are doing well.

Adding to the weird place are the early impacts of an international trade disputes. I am not as concerned as many pundits over trade as it is easy to overthink impacts. But change itself is disruptive and messy, and the usual result is a depressive affect for economic activity. Markets do not like uncertainty, and it is difficult to envision how the current market volatility will abate this year.

Other Economic News this Week:

The Econintersect Economic Index for July 2018 shows the improvement cycle continues and remains well into territory associated with normal expansions - although this month it forecasts slightly weaker growth. There are continuing warning signs of consumer over-consumption, but the relationship between retail sales and employment improved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Economy



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