April 19, 2019

Next Friday, April 26, first quarter GDP growth will be released.  Estimates of growth for this quarter have swung dramatically as additional data became available.  For example, the widely followed GDPNow estimate produced by the Atlanta Fed started at 0.3% in early March.  As subsequent data were released that estimate has steadily revised upwards.  Today it is at 2.8%.  Nobody knows exactly what growth rate we will see next week.  We project first growth of 1.9%; the consensus forecast is roughly comparable.  We believe that the Atlanta forecast – and forecasts made by other economists – were biased downwards by a belief that the end of the expansion is not that far down the road.  We do not share that view.  The economics profession in general — and readers of this commentary — would be better served by developing a somewhat more upbeat mindset.

How could first quarter growth expectations shift so dramatically?  When the Atlanta Fed forecast was released initially on March 1, most of the hard data for January had been released and those tidbits of information were uniformly weak.  But to make a forecast for the quarter as a whole, economists must make expectations for each economic indicator for February and March.  The only way the Atlanta Fed could produce a growth forecast of 0.3% would be to assume that the January weakness would continue into subsequent months.  They must have been relatively convinced that this was the beginning of the end, and that the economy would slip into recession by yearend.

That expectation turned out to be dead wrong.  The stock market reversed direction and has completely eliminated its fourth quarter decline.  Consumer and business confidence rebounded.  Home sales surged.  Retail sales surged.  Employment rebounded from its anemic February performance.  The trade gap narrowed dramatically in February and shrunk further in March.  As each indicator was released, the Atlanta Fed progressively revised its first quarter growth estimate upwards.  Today it stands at 2.8%.

Clearly, the stock market selloff late last year was both dramatic and scary.  That was followed by the protracted government shutdown which exacerbated the negative sentiment.  But shouldn’t those factors have been regarded as temporary and likely to negatively impact growth for only a relatively brief period of time?  That was our conclusion and we envisioned a snap-back in February and March.  Others apparently saw the situation differently.

We now know that GDP growth in the fourth quarter was 2.2%.  If we end up with, say, 2.0% growth in the first quarter, then the economy will have averaged 2.1% GDP growth in those two quarters despite the stock market selloff and the government shutdown.  That suggests to us that GDP growth in the final three quarters of the year should be more rapid than that.  We expect GDP growth to average 2.9% in those three quarters and growth for the year to come in at 2.7% — not too much different from last year’s 3.0% pace.

The U.S. economy has demonstrated an impressive ability to shrug off bad news.  Think of the obstacles it has overcome during the course of the expansion.  We have had repeated financial crises in a number of European economies, a sharp slowdown in growth in China, anemic growth in Europe,  fear of a nuclear war with North Korea, government shutdowns, a downgrade in the rating of U.S. Treasury debt, a dramatic increase in oil prices which at one point exceeded $100 per barrel and, now, Brexit fears.  Fragile economies do not survive those obstacles.

Why is it so difficult to believe that the U.S. economy is basically healthy and that the factors that tend to produce recessions are nowhere in sight?  Mainstream economists presumably believe the expansion will soon end simply because it is on the cusp of becoming the longest expansion on record.  Therefore, the end of the expansion must be relatively close.

While we do not want to oversimplify a complex situation, the expansion will end once the economy overheats, inflation begins to rear its ugly head, the Fed responds by pushing the funds rate higher from 2.5% today to perhaps 5.0%, and the yield curve inverts.  None of those factors are on the horizon for the foreseeable future.

Bobby McFerrin had it right — “Don’t worry, be happy”.

Stephen Slifer

NumberNomics

Charleston, S.C.