GDP Growth Is Probably Weak In Q1
It appears by most accounts Q1 2018 won’t be a great quarter for GDP growth. Keep in mind, the expectations have been high because of the tax cut and subsequent fiscal spending increase. The latest $1.3 trillion budget, which was passed on Friday, has an $80 billion increase in defense spending, which is the largest increase in 15 years, $1.57 billion in funding for a fence at the southern border, $4 billion towards solving the opioid crisis, $10 billion towards infrastructure, which includes improving highways, airports, railroads, bridges as well as funding high-speed broadband development, and $2 billion in funding for mental health and school safety programs. The fiscal spending boost will provide more of an impact to the economy in the final 3 quarters than Q1 because it was just passed.
Understand that the steaks for GDP growth have been raised because of the heightened expectations and the rate hikes. Since the Fed expects 2.7% growth, anything below that pace would be a setback. Before I look at the current data, let’s review what the rest of the year could look like. As you can see from the chart below, the ECRI weekly leading index growth rate ticked down slightly to 5.5%. I consider this good news because the growth rate had been falling sharply in the past 2 months. The improvement from September to January implies the 2nd half of the year should see quicker growth than Q1. This chart should calm anyone down who is panicking about a potential recession because the stock market is down sharply. It looks like the economy will be fine and earnings growth should be strong. An all-out trade war needs to occur to push the stocks into a bear market.
Great Durable Goods Report
The durable goods orders report was spectacular. This further exemplifies that February was a great month for manufacturing even though the rest of the economy was weak. The new orders were up 3.1% month over month. That’s an acceleration from a 3.5% decline last month. Year over year, new orders were up 8.9% which beat last month’s growth rate of 7.1%. Ex-transportation month over month growth was 1.2% which was above last month’s decline of 0.2%. On a year over year basis, this was up 8.1% which beat last month’s 7.1% growth. Core capital goods were up 1.8% month over month and 8% year over year. That was better than -0.4% and 6.2% respectively for last month. Motor vehicle sales were up 1.6% which is very unusual because the segment has been in decline. If the strength continues in March (which might be unlikely because of the 4 nor’easters), GDP growth might come in better than the Atlanta Fed’s estimate which I’ll review later in this article. Orders for primary metals were up 2.7%. This might be because the tariff news has cause prices for steel and aluminum to increase.
Sold Jobless Claims Report
The jobless claims came in at 229,000. That was a 3,000 increase from last week and 4,000 above expectations. The 4 week moving average, which gets rid of some of the vacillations in the index, was up 2,250 to 223,750. This is extremely low, signaling another big jobs report is coming. The only thing that can stop 200,000+ jobs being added in March is a full labor market. I still think the labor participation rate for prime aged workers being lower than the prior two cycle peaks means a few more months of above population growth jobs growth can occur without hitting full employment. At this point, more jobs being added can be considered a bad thing because it means the economy is racing quickly towards the end of the labor market cycle. The market doesn’t see it this way because it is less forward looking than me. It was happy with the 313,000 gain last month. The only thing that worries the stock market is accelerated wage growth because that means inflation is here.
Disappointing PMI Flash Reading
The PMI composite flash gives us a peak into how the economy will look in March. The first indicator is that more of the same is coming as manufacturing will be strong and services will be weak. The manufacturing PMI was 55.7 which was 0.2 below last month and 0.3 above the estimate. The services PMI was 54.1 which was 1.6 points below the consensus. It was 0.7 below the lowest estimate on the street. It was 1.8 points below last month. It wasn’t that weak last month even though services were weak. It’s interesting to see if this implies convergence between survey data and actual data is coming or if the services sector weakened further in March.
Trucking Is Improving
The trucking industry is running as hot as it can be right now. General Mills recently reported a disappointing quarter because 20% of its freight costs were paid at the spot rate instead of the usual 5%. The spot price is 30% to 60% higher than the contract price. There has been increasing fuel costs, a driver shortage, and surging demand. The chart below measures the linehaul rates. The index was up 6.5% year over year in February. It has seen positive growth for 11 months. You can see this recent growth in the lime green line (2017) and the orange line (2018).
GDP Estimates
The Atlanta Fed GDP Now estimate was unchanged at 1.8%. The great durable goods report pushed up the estimate for real nonresidential equipment investment growth from 5.8% to 6.2%. The Atlanta Fed is the most pessimistic of the bunch. The NY Fed model shows 2.85% growth for Q1. The increase of 0.12% came from data revisions and the durable goods report. The estimate for Q2 growth is 2.98%. I think Q2 will be better than Q1. The St. Louis Fed GDP Now forecast is showing a scorching hot growth rate of 3.78%. It has been accurate in the recent past, so I wouldn’t completely rule out a great GDP report.
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