Where’s the beef?
Not many people in today’s markets may remember that catchphrase from a 1984 commercial for American fast food chain Wendy’s. The question has gone on to take new meaning by becoming a general expression of skepticism for an idea or product. It is also the thought that crossed our mind when we checked in this week on the Atlanta Federal Reserve’s real-time, quantitative-driven forecast for Q1 GDP growth in the US (called GDPNow). Having started with an exceptionally high forecast in the early weeks of the year between 4% and 5%, it has consistently ratcheted lower to where it stands now at a 1.8% estimate. Seasonally, first quarter growth has been soft these past several years but with so much support across the four pillars of economic activity (consumption, investment, government spending, net exports) it is surprising to see the algorithm revise so much lower. Simplistically, the math works like this. Each week, there are certain economic statistics released. The computer-driven model is constructed to identify those data points most influential in economic growth and incorporate them into the forecast. Looking at the progression since January, the biggest contributor to the negative revision is in the Personal Consumption category driven by data points related to housing (existing home sales, new home sales/prices/costs, housing starts). That is not terribly surprising given the increase in interest rates which have trended higher since mid-2016 but took its most recent leg up starting in Q4 2017.
The GDPNow estimate of growth is certainly not perfect. It tends to be volatile (especially in the early weeks of each quarter as there are relatively few data points) and has been plain wrong several times. That said, even though it is early days of the fiscal stimulus which Congress put in place with tax cuts and infrastructure spending, a sub 2% annualized growth number in the quarter would come as a negative surprise. While this may abate inflation concerns a bit (at least until more inflation-specific data rolls in to show it firming), at the end of the day growth is what supports the valuation of equities in today’s market. Weakening confidence in growth may cause others to ask the substance question.