The Q1 GDP report will be released on Friday. Leading up the report, the Atlanta Fed’s GDP Now released its final estimate for Q1 which came in at 0.2% growth. This is down from 0.5% growth which makes it an outlier compared to the consensus GDP estimate. The estimate for real consumer spending growth fell from 0.3% to 0.1% because of the weak retail trade report. This estimate is consistent with the weak restaurant traffic I discussed in a previous article. Inventory investment for the first quarter had its estimates fall from -0.76% growth to -1.11% growth. The estimate fell because of advance reports on durable manufacturing and wholesale and retail inventories. Finally, the real equipment growth estimate increased from 5.5% to 6.6% because of the recent durable manufacturing report and light truck sales report. This 0.2% growth estimate stands in stark contrast to the 2.7% growth estimate the NY Fed’s model has. My opinion is the Atlanta Fed’s model will be proven more accurate since it incorporates more hard data than the NY Fed model.
As I have discussed many times, the slack in the labor market is important because it determines wage growth. Usually at the end of the cycle, wage growth accelerates and then a recession hits. Whether you think wage inflation causes recessions or wage growth just happens to occur when cycles mature depends on your philosophic outlook on the economy. The theory that wage inflation leads to declining profit growth which pushes the economy into a recession as layoffs ensue is being supported by this cycle. This cycle has been longer than usual and the labor market hasn’t become tight enough to spur hourly earnings growth.
The chart below gives a great picture of the slack in the labor market. It shows the number of unemployed people who found employment as a percentage of all unemployed people. In layman’s terms it’s an indicator of how easy it is to get a job. The indicator reached 28% in February which is nearing the peak before the financial crisis, but isn’t close to the peak in the early 2000s. This chart supports the concept that this cycle has been slow to mature because of the remnants of the recession. At the bottom of the labor cycle in 2010, the indicator fell about 8% lower than it did in the last two cycles.
The good news about this indicator is that wage growth should start to come this year. If the cycle is like the last two, a recession would occur in 2018. Obviously, this doesn’t jive with the Atlanta Fed forecast which shows the economic recession may have already started. The jobless claims report showed a modest uptick in claims to 257,000 from 243,000 in the prior week. The metric appears to have bottomed, but there’s no trend which suggests the labor market is about to roll over. Baring onetime events, I would say the jobless claims needs to rise above 275,000 for three weeks for me to claim the labor market is going from good to ok. The jobless claims report suggests the labor market is great, but I’d say it’s good because wage growth is below CPI growth.
The reason it’s always tough to project recessions is because leading up to them, the data is inconsistent. You know the economy is in a recession when almost every data point syncs up. The stock market will have already fallen sharply by the time the sync up moment happens as everyone sees the recession. When TV commentators try to predict when the recession will end, you know it’s getting close to the bottom, but it’s not there yet. It’s interesting to see pundits try to predict the end to a recession that they never predicted in the first place. The fact that they acknowledge it tells you it has become consensus wisdom.
I mentioned that the metrics don’t sync up because the number of unemployed people finding a job signals a recession happening in 2018, but the chart below signals one is coming sooner. As you can see, the delinquency rate on credit cards started to increase in 2015. The rate started to increase in 2006 and 2000 which would signal a recession later this year since the recession happened two years after those points. The difference between this cycle and the prior two is that they had mid-cycle slowdowns which were visible in the delinquency growth. The current cycle has had many fits and starts, but because of how bad the recession was, the delinquency rate was able to decrease during the mini economic slowdowns.
The chart below reiterates my point that this cycle has had many fits and starts. The second half of 2012 saw barely any growth. The first quarter of 2014 had negative GDP growth. Then the end of 2015 and early 2016, once again, saw barely any growth. The best part of the recovery saw average of 2.5% growth which still isn’t up to where it could be if productivity growth hit historical norms. You can see the estimate for growth in Q1. Even though it will be weak, many investors have been lulled into the notion that this has been a lumpy weak recovery. One weak quarter can be ignored because it made sense to ignore the other weak quarters.
Conclusion
The GDP growth is expected to be 0.2% according to the Atlanta Fed model. If the headline print comes in below 1%, it could motivate the president to become more aggressive on the fiscal policy front. Trump’s goal is for 3%-4% GDP growth, which means he won’t be happy with such a weak report. The GOP is on the right path with tax and healthcare reform, but needs leadership to get the members to come to a consensus. This report may be the catalyst which provokes Trump to lead the party with a greater sense of urgency. Fiscal policy news can nullify the negative effects a weak GDP report has on the stock market because investors can make the case that it is backwards looking while fiscal policy affect the future.
Recent Comments