GDP update: moderate growth and disinflation continue

Markets have over-reacted to today's first quarter GDP stats. Quarterly numbers are by nature volatile; it's more important to look at them in a broader context, which the following charts provide.

Chart #1

The first estimate of Q1/24 GDP growth came in weaker than expected (1.6% vs 2.5%). But as I see it, that merely corrected for some stronger-than expected numbers in Q3 and Q4. On balance, and as Chart #1 shows, real GDP is growing at about a 2.2% annual pace. It's actually a bit below the 2.2% trend growth pace which began in mid-2009. It's unremarkable, as I've been saying for a long time. What's really remarkable is that the economy today is about 20% smaller than it could have been had it continued the 3.1% growth trend that prevailed from 1966 through 2007. A lot of money has been left on the growth table! That should be the big story. 

Chart #2

Chart #2 shows the year over year change in the GDP deflator, the broadest measure of inflation that exists. On a quarterly basis, the deflator grew at a 3.7% annualized rate, which was a bit higher than the market's 3.4% expectation. Does this qualify as "hot"? Hardly. On a year over year basis the deflator rose only 2.4% and there is every reason to think that it will continue to moderate over the course of this year, for the same reasons I have argued that CPI inflation will moderate.

On balance, I see no reason to worry about a near-term recession, nor to worry that the Fed has not done enough to tame inflation. Swap and credit spreads remain very low, the banking system is flush with liquidity, financial conditions are quite healthy, the stock market is healthy, the dollar is strong, unemployment claims are low, job gains continue at a reasonable pace, and there is little risk of an imminent increase in tax or regulatory burdens.