The Passing Storms

Despite expected disruption to US GDP growth in Q3 from hurricanes hitting Texas and Florida, the economy posted an above-consensus annualized growth rate of 3.0% quarter-over-quarter.  Underpinning the growth was consumption making up just over half of the growth (contributing 1.6%) followed by inventory builds (0.7%), net exports (0.4%), and fixed investment (0.3%).  True to form, government was of no help (flat contribution).  Of course, economists always love to talk about “real” numbers or after adjustment for inflation which this statistic is.  Adding back in the inflation component of 2.2% (GDP deflator), nominal activity was 5.2% growth quarter-over-quarter (annualized rate).  It is important to keep the nominal in mind because we live in a nominal world.  Nominal activity affects our mood and outlook.  A higher level of absolute economic activity is felt by people and thus increases their confidence.  Confidence is the foundation of economies and financial markets and so is critical to furthering the globally coordinated expansion we have been seeing.

Earnings reported from public companies are nominal too, and we are in the midst of the earnings seasons.  Technology continues to blow away expectations and move markets.  The sector now comprises over 22% of the S&P 500 as of the 6/30/17, an expansion of 10% over prior year-end.  Historically, when a sector has exceeded the 20% threshold it has signaled that it may be overvalued. That hasn’t held back the technology sector which crossed the line years ago.  Instead, perhaps it is the evolution of the technology sector to being really in different sectors.  No single company embodies that better than Amazon.  While profitability is driven primarily by cloud computing (Amazon Web Services, this year they have upended the grocery market with their acquisition of Whole Foods and now have received wholesale pharmacy licenses which could change the pharmaceutical sales market.    Today, technology is the economic storm sweeping through industries changing business models in its wake.