Thursday, February 28, 2019

GDP beats but the market remains skeptical

It's old news by now, but today's Q4/18 GDP report came in a bit stronger than expected (+2.6% vs +2.2%), and growth for the calendar year 2018 (3.1%) was the strongest in more than a decade, and stronger than the 2.3% average annual growth rate of the current economic expansion. However, the market is acting like it thinks this may be the high-water mark for the foreseeable future. This is a show-me market, and so far the economic improvement we've seen under Trump's ministrations is less than spectacular, and certainly less than supply-siders (like me) would have expected to see given Trump's successes at rolling back regulatory burdens and slashing corporate income tax rates. But it is nevertheless progress.

Chart #1

Chart #1 shows the year-over-year growth in quarterly real GDP. Q1/15 actually holds the record for post-recession growth (+4.3%), but Trump apologists prefer to look at calendar-year growth since that puts last year in a more favorable light.

Chart #2

Chart #2 remains one of my most-favorite charts (and arguably a top Reader's Choice as well). You can cheer last year's 3.1% growth all you want, but from a historical perspective, it's only equal to the 40-year average growth rate that preceded the Great Recession. It's nice that the GDP "gap" suggested by the chart is no longer widening, but it's clear that things could be a whole lot better. We'll have to see more and better growth numbers in coming quarters before crowning Trump the King of Growth.
Chart #3

Chart #3 shows quarterly figures for real and nominal annualized GDP growth. The last quarter hardly stands out as unusual.

Chart #4

Chart #4 shows the year over year change in the quarterly GDP deflator, which is the broadest measure we have of economy-wide inflation. Last year inflation notched a 2.0% rate of growth, which is a bit higher than the 1.6% average for the past 10 years. But there is no obvious sign of inflation trending higher or lower than the Fed's preferred 2% rate. I'm always willing to be an inflation bull, however, especially during times when lots of political pressure is being put on the Fed to avoid being too tight with monetary policy. So I worry that inflation might trend a bit higher in coming years because the Fed will likely prefer to err on the side of caution and postpone rate hikes. But as with growth, we'll need to see more evidence before drawing firm conclusions.

Chart #5

In order for the economy to break out decisively from its "new-normal" 2+% growth rate since 2009, we'll need to see a pickup in business investment. Chart #5 shows one such measure: real gross private domestic investment registered an impressive 7.05% last year, which is substantially higher than its long-term trend of just over 4%. Still, there still appears to be a "gap" here that is sizable. Good news, but not yet in the nature of "winning."

Chart #6

Chart #6 updates another of my favorite charts. Here we see that the market's level of fear and uncertainty continues to edge downward as equity prices continue to edge higher. The market is climbing one of its biggest "walls of worry" in years, and it still has a bit to go before establishing new record prices. That's understandable, given that Trump's character is still under the microscope, trade agreements are still lacking, problems like N. Korea continue to worry, and we have yet to see convincing evidence that the economy is on its way to sustained, 3-4% rates of growth.

Chart #7

To emphasize my point that the market remains skeptical, I offer Chart #7. This compares the level of real yields on 5-yr TIPS (which arguably reflect the market's perception of the economy's real growth potential) to the 2-yr annualized growth rate of real GDP. Real yields do tend to track real growth, and that makes perfect sense. It's notable, therefore, that real yields have dropped by about 50 bps since late last year. This suggests to me that the market was much more optimistic about future growth a few months ago than it is now. Not surprisingly, the Fed is too. That is why nobody is projecting any meaningful rises in short-term rates for the foreseeable future. This chart suggests that the market expects real growth to average about 2.5%. That's ho-hum enough to keep the Fed—and the bulls—on the sidelines.

Chart #8

I'll close with an optimistic chart, since I remain optimistic that things will work for the better. Chart #8 is Bloomberg's weekly Consumer Comfort chart, and it shows a meaningful rebound in consumer sentiment in recent weeks. It's up an impressive 35% since just before the 2016 elections, and close to the all-time high of 66 which was reached in early 1999 under the Clinton administration.


brave chicken said...

Two things:

1. $22 Trillion Fed Debt

2. Revisions to GDP & earnings

John A said...

Where are you getting 3.1% GDP growth for the whole year last year? The number was 2.9%:
"Real GDP increased 2.9 percent in 2018 (from the 2017 annual level to the 2018 annual level), compared with an increase of 2.2 percent in 2017 (table 1)."

steve said...

I agree the markets are on edge-at least the bond markets. It is extremely rare to see bond traders and stock traders at such diametric odds. that said, bond traders are by their very nature more conservative than stock traders. Still, one is very wrong...

My guess (and bet) is bond traders and am therefore 100% long bank loans.

Scott Grannis said...

Re: Federal debt outstanding: the correct figure is $16.2 trillion. That is the debt owed to the public. The much larger figure ($22 trillion) includes debt the government owes to itself, which is just double-counting. Source:

Scott Grannis said...

Re: year over year GDP growth. I am using the change in fourth quarter GDP estimates, not the annual average for each year.

Benjamin Cole said...

Another superb review by Scott Grannis. Scott says he has some favorite charts, but I think all of them are my favorite charts.

I would not worry about inflation too much. The Reserve Bank of Australia has a 2% to 3% inflation band target. They have tolerated some brief episodes of 4% inflation. They have not had a recession in more than 30 years.

Give to me moderate inflation if that is a price to pay to dodge recessions l.P..

Al said...

Scott, would you say you have a Panglossian view of the future?


Johnny Bee Dawg said...

Poor marcus.

The Year over Year change puts Barack as the only President in US history to never preside over a single year of at least 3% economic growth. Im going to study His policy & rhetoric differences and see if I can find a pattern. Also the lawlessness and scandals. Gonna check that out. For some reason, investors kept record high cash levels during those 8 years.

Its a quandary.

brave chicken said...

FYI, those mysterious Trillions and debt reality (part 1):

Treasury debt held by the public is measured as the sales price plus
the amortized discount (or less the amortized premium). At the time of
sale, the book value equals the sales price. Subsequently, it equals the
sales price plus the amount of the discount that has been amortized
up to that time. In equivalent terms, the book value of the debt equals
the principal amount due at maturity (par or face value) less the un-
amortized discount. (For a security sold at a premium, the definition
is symmetrical.) For inflation-indexed notes and bonds, the book value
includes a periodic adjustment for inflation. Agency debt is generally
recorded at par.

John A said...

Re: Year over year change in GDP.

If we use the same methodology Scott used for calculating yearly GDP, then indeed, Obama had a year with 3%+ GDP growth. 3.8% to be precise:
"Unfortunately for the pro-Trump spin machine, the best year-over-year growth in Obama’s presidency (3.8% from the first quarter of 2014 to the first quarter of 2015) is higher than the best year-over-year growth under Trump (3.1% from the fourth quarter of 2017 to the fourth quarter of 2018)."

honestcreditguy said...

Innovation wave 6 will help wall of worry rally...
safety fleeing into US keeping bonds and equities playful.
Obama GPD was gift wrapped at .25 via the fed....truth

The Cliff Claven of Finance said...

To John A:
Anyone who tries to defend Obama's GDP growth,
the worst in American history, despite the fact
he took office near an economic trough,
is a data miner, or cherry picker, or
just a biased old fool !

For Real GDP:
2018 was up +2.9% over 2017
2017 was up +2.2% over 2016
O'Bummer averaged +2.2% after the recession ended,
and +1.5% for his full eight years !

The 2018 and 2017 year over year comparison above is more conservative,
and more accurate, than the 4Q 2018 versus 4Q 2017
data you reported ( simply because it was over 3.0%, I assume ! )

2018 Real GDP was boosted slightly by the large,
unnecessary, corporate tax cut,
which will have no effect on 2019 and future years,
because it was funded by deficit spending.

Nnew government debt was required to replace lost
corporate tax revenues, and will require interest payments
to infinity !

2018 was also boosted in some way by a much healthier
environment of government regulations, although the worst
of them still exists ( the "endangerment finding" marking
CO2 as "pollution", when anyone with basic science knowledge
knows CO2 is the staff of life, definitely NOT pollution ! ).

Other economic data released last week look awful,
not that one week is a long term trend:

McKibbinUSA said...
This comment has been removed by the author.
McKibbinUSA said...

The best individual prescription for contending with today's economy is optimism -- you should at least feel good while the economy flies off the cliff...

NormanB said...

#2 Chart: It is pretty obvious that a new trend line is in existence stating in 2009 and that the gap you show will never be filled. It's a new era, sorry.

Scott Grannis said...

Re NormanB; "It is pretty obvious that a new trend line is in existence stating in 2009"

Well, I don't know why it is obvious, other than that it appears to exist. Why would a trend line that held for 40-50 years suddenly stop? That is the question. What happened in early 2009 to make the next decade totally unlike the previous 4-5 decades? Did the long-term trend rate of growth actually slow dramatically, never to pick up again? Or has the past decade been an aberration, caused by bad policies? An aberration that can be reversed with the right policies?

I have long maintained that the slow growth beginning in 2009 is not likely due to demographics, because demographics don't change from one year to the next, they change over multi-year periods. But we do know that policies changed dramatically under Obama.

John A said...

"Well, I don't know why it is obvious, other than that it appears to exist. Why would a trend line that held for 40-50 years suddenly stop?"

No, it really is demographics:
1) The labor force stopped growing after 2000, and really came to a halt after 2009. Look at the chart below, you can SEE a halt in the size of the labor force after 2009:

2. Population growth has been slowing down as well. Edit the graph to do % change y-o-y:

You should re-do your GDP trend chart, and make it a GDP per capita chart.

Unless population and labor force growth picks up dramatically, we're stuck in 2% growth mode.

John A said...

"The labor force stopped growing after 2000"

Sorry, that should have read labor force participation rate. That *did* peak in 2000 and really tumbled after 2009:

Johnny Bee Dawg said...

The labor force participation rate for MEN peaked in 1950. Just a year after it started being tracked.
But it fell off a cliff after Barack policies arrived.
The only times of stabilization were under Reagan and Trump.

Socialism and its accompanying rhetoric serve as a wet blanket on everything.

John A said...

The LFPR fell off a cliff because of the Great Recession, not because of anything Obama did. The recession began in December 2007, which was almost a year before Obama was even elected.

steve said...

Jobs number an aberration or a harbinger of things to come? Bond market is SUPER skeptical but bond traders are by their very nature more conservative than stock traders.

Johnny, you're our resident stock market whiz. What say you?

Johnny Bee Dawg said...

John A: The LFPR didn't fall off a cliff until the election of 2008.
Reversing the 2007 mark-to-market accounting changes in March 2009 couldn't even stop it.
Barack rhetoric and threats kept a lid on prosperity. The policies and the lawlessness sucked bad.

steve: I don't know anything about job numbers being a harbinger. I just follow the market risk indicators, and act accordingly.

Market indicators that were washed out back at Christmas, have gone coast to coast now.
"New Highs/New lows" has gone from under 2% to over 92%, (uninterrupted, in only 2 months!) That indicator has finally reversed down this week. (It was screaming "buy" at Christmas....not so much, now.)
Also, the percent of stocks trading above their 50 Day MA, and 200 day MA had similar phenomena, just less extreme.
Towards the end of Feb, the number of equities reversing down on their charts vs. reversing up on their charts has been about 5:1.
I think the Dow Transports have been down every day this month.

So the extreme bullishness of the oversold bounce played out. We will have to wait and see, now.
The only move I'v made this month was to take partial profits of things that have soared, and to swap into equity holdings with less standard deviation than the market. You can compare 3 yr standard deviation vs the market for all your holdings at Morningstar for free. I'd rather be low vol at the moment, after this beautiful run up.

The S&P Low Volatility etf (SPLV) and the S&P High Beta etf (SPHB) can duplicate these shifts, while keeping one invested as supply and demand sort themselves out.
I buy high beta holdings when risk indicators are washed out like at Christmas, and switch to low vol when they are stretched like end of Feb., and I want to calm things down.

SPHB significantly outperformed the market during the bounce.
SPLV has significantly outperformed since end of Feb.
This is typical behavior, historically.

Same phenomenon in bonds: the "riskier" high yield, Sr. loans, and Converts, all massively outperformed the during the equity bounce, as one would expect. 5:1 over the aggregate bond index, in fact. So, I just recently calmed down my bond holdings, too. Im in low-vol, treading-water mode right now until we see which way we go.

John A said...

"John A: The LFPR didn't fall off a cliff until the election of 2008"

Please, spare us. What on earth could a president do - ANY president - that would suddenly make large numbers of people decide to drop out of the labor force? People don't drop out of the labor force just because somebody got elected. People drop out of the labor force because they've retired, or because they lost their job and retired early, or because they're disabled and can't work anymore, and similar reasons. Your stance is completely without any logical reasoning.

Johnny Bee Dawg said...

John A: think the reason the LFPR fell off a cliff after the 2008 election is because everyone reached retirement age at the same time? But you say Im the illogical one?

Or did people quit en masse? Or did companies abruptly slow down their hiring?
Hmmmm, what could have possibly made that happen?

What could a President do, you ask?
Well...promote socialism and extend unemployment benefits. Threaten profits with confiscation. Punish business with lawless healthcare expenses. Did you forget? Why hire?

Also, promise increased redistribution from makers to takers involving free healthcare , cell phones, food stamps, and mortgage assistance. Why work? Universal Basic Income bay-bee!
Remember...the LFPR fell during the RECOVERY.

It’s not MY stance that’s illogical. I was against all those bad policies. Thank God He’s gone.
Policies matter.

John A said...

Geeze, you're really out in left field. You seem to completely forget there was a recession that started almost a year before Obama was even elected. And you don't even know the definitions of the things you're talking about.

To wit: Extending unemployment benefits does not make people drop out of the labor force, because people on unemployment (and thus, still looking for work) are still counted as being part of the labor force! Duh. *shakes head* Thus, the LFPR did not fall because Obama extended unemployment benefits. If anything, it might have had the opposite effect, since receiving unemployment benefits forces people to remain in the workforce.

Re: Health care. Obamacare was not passed until 2010, and it did not really take any effect until 2011, at the earliest. By 2010 the LFPR had already been in free-fall for some two years. Thus, Obamacare had nothing to do with the LFPR's decline either, because it was already falling long before Obamacare took effect.

Obama did not pass universal basic income. At this point you're just making things up to try to blame Obama for anything you can blame him for.

ALL of the facts indicate the falling LFPR had little or nothing to do with anything Obama did. It was in free-fall well before Obama did anything that theoretically might have effected it.

Johnny Bee Dawg said...

Socialist rhetoric from political leaders kills risk taking, John A.
Obama was like having a babbling idiot in charge of the country for 8 years.
And people clapped for it. Like they do for AOC.
First President in US history to never have a single year of 3% growth.

Record cash on the sidelines the entire time. For good reason.
Thank God He's gone.

steve said...

Unfortunately Johnny because our illustrious leader is such a twitter crazed ass he may have made headway for someone far more deleterious to our economy-and very way of life than Obama ever was.

Hope I'm wrong.

John A said...

"Socialist rhetoric from political leaders kills risk taking, John A."

Bill Clinton spent a lot of time "rhetotic-ing" about universal health care, and the LFPR still went up.

The president under whom the LFPR rose the fastest was ... Jimmy Carter.

Your arguments are devoid of fact.

Johnny Bee Dawg said...

John A:
Bill Clinton abandoned almost all of his socialist rhetoric after voters threw DEMs out of Congress after 2 years. He and Al even went on a bus tour to apologize. “We hear you. The era of Big Government is over.” That’s what HE said. The two achievements he said he was most proud of were nafta and welfare reform...both part of the PUB agenda. How soon you forget. The exact opposite of Barack. PUBs taking over Congress always helps growth. Markets and business owners loved it.
My facts are just don’t like em.
The LFPR plummeted after the 2008 election.

According to you, everybody just decided to retire early all at once right after the 2008 election? Do I have that right? Abrupt changes toward economy-crushing policy and rhetoric were just unrelated, coincident factors? Makes sense. Worst recovery ever, wonder why.

John A said...

- I said that the LFPR started falling before Obama enacted any legislation (such as Obamacare), and thus it could not have been responsible for the fall of the LFPR
- You replied by saying that socialist *rhetoric* counts
- I replied by citing another example of nearly identical rhetoric some 15-17 years earlier, that did *not* result in a falling LFPR
- So now you are once again moving the goalposts. But yet again, in the process of doing so, you are contradicting yourself. According to you, the election of a republican congress 2 years after Clinton was elected resulted in a surge of growth. But suddenly you're forgetting there was a nearly identical election of a republican congress 2 years after *Obama* was elected. It is hypocritical of you to cite republicans taking over congress as being responsible for Clinton's growth surge in the last 3/4 of his term, while continuing to blame Obama for tepid growth in the last 3/4 of *his* term, even though there was an identical republican takeover of congress.

Johnny Bee Dawg said...

John A:
Read it again.
The entire difference between the Bill Clinton scenario is that Clinton capitulated.
Barack doubled down.

Everything I wrote is correct.

John A said...

BTW in addition to moving goalposts you are also incorrect on this:

"First President in US history to never have a single year of 3% growth"

As I noted on March 1 near the top of these comments, Trump also has not had a year of 3% GDP growth. If we measure GDP growth the same way Scott did, then Obama did, in fact, have 3% GDP growth - 3.8% to be precise, from Q1 2014 to Q1 2015. Furthermore, with recent retail sales data today plus recent trade data, Q4 GDP looks like it's going to be revised down, which might put that 3.1% GDP growth number in jeopardy.

John A said...

"Read it again.
The entire difference between the Bill Clinton scenario is that Clinton capitulated.
Barack doubled down."

BTW I still have yet to hear why and how Jimmy Carter managed to achieve such blistering LFPR growth. Futhermore, probably the most socialist president we've ever had - LBJ - achieve growth that puts Trump to shame.

John A said...

"The entire difference between the Bill Clinton scenario is that Clinton capitulated."

I should further add that you seem to live in this strange world where the president has these god-like magical powers. The POTUS can cause tens of millions of people to do something (or not do something) just by uttering the word "social," without any changes in policy whatsoever. You don't seem to be aware that there are as many democrats who might want to buy something while Obama is president, as there are republicans who might want to buy something while Trump is president. Over the next couple years, as it becomes increasingly clear that growth under Trump is going to be no different than under Obama, it will become painfully obvious that the jawboning and policies you think make these big differences in growth, actually don't.

steve said...

Children seriously, enough is enough...

Larry said...


WealthMony said...

The LFPR is largely, but not entirely, due to demographics. It's rise in the 1970s was no doubt due to baby boomers coming into the workforce, plus more women working outside the home. It continued to rise throughout the periods of Reagan and Clinton, no doubt partially due to the revival of the economy. You'll notice it stopped after the 2001 recession and declined until 2016 (2005-2007 being the exception). I'm sure both the 2001 and 2008 recessions contributed to workers leaving and not returning, but demographics again plays a major roll, and it might be that more mothers chose not to return to or enter into employment. And I am sure government policies have been a contributing factor, and rhetoric may have played a role in forming attitudes, but I do not see how we can lay the blame on any one factor. There's no doubt President Obama stressed the importance of a strong federal government, while President Trump's emphasis has been on business. To the extent each emphasis from the bully pulpit has impacted potential workers from entering the workforce, I am not sure. It would certainly be interesting and valuable to see a thoughtful and objective study done on the LFPR going back to the start of the 20th century in the United States.

brave chicken said...


VIX looking very low here:

"For the first time since Oct. 4, 2018, the VIX dropped and closed below 13. The last time the VIX was down at these levels – from May through September 2018 – the S&P 500 enjoyed a steady climb to new all-time highs."

10 year Treasury yield looking much lower than last October @ 2.591%

Anyone think The Wall of Worry is headed for euphoria?

steve said...

Has a feel like '98 heading into '99. Stocks swooned in August/September and then went crazy leading into 2000. We all know what happened then.

brave chicken said...

Super cool stuff:

Last week’s Fed Beige Book reported that Broadway ticket prices, one of the most reliable leading indicators, “were down 5-6 percent from a year earlier.” The last time a drop of this magnitude happened was December 2007 when “Average ticket prices for Broadway shows rose less than usual this past December and were down more than 5 percent from a year earlier.”

Still thinking this is a temporary patch of weakness? How about the Federal Reserve’s Lael Brainard speech on March 7th which she concluded with, “The most likely path for the economy appears to have softened against a backdrop of greater downside risks.”

Johnny Bee Dawg said...

I want to see Broadway shows even less this year than I did last year.
The ticket price I will agree to pay continues to plummet.
I blame Brexit uncertainty.

Is Cats still playing?
How about Legally Blonde, the Musical?