Why the mixed signals on GDP growth are 'driving me crazy'
- GDP - the queen of all numbers - is stuck in neutral.
- Yet, soft data shows the economy moving ahead.
- First quarter earnings will end the tug of war.
Everyone in the investment business is a slave to numbers. Even when they are not to our liking, most of us secretly relish in the certainty and finality of them. Whether it's the Fed Funds Rate, corporate earnings, the number of autos sold in a year, or the price increase on single family homes, we dissect these numbers to offer us clues into the direction of markets and securities.
This brings me to what is currently driving me crazy. For months, we, at my investment firm, have felt, that the economy was improving; that the steady increase in jobs, the housing market, the bottoming of oil prices, and upward trend in hourly wages would translate into better GDP numbers. GDP – the queen of all numbers – the big jackpot of digits on which we all crave insight, seemed poised to break out of its semi-comatose 2 percent range for more than a quarter. However, despite what appear to be obvious signs of improvement, the estimates from nearly every single group that tracks GDP growth is stuck in economic anemia, with very few outliers. What is going on?
I am not the only investor confused by mixed signals. UBS published a piece last week called "Are Soft Data Predicting a U.S. Boom?
The authors describe a wide gap, seen in the exhibit below, between "soft data" surveys that would indicate growth of 3.7 percent in 2017 in contrast to their own internal models of actual economic activity which suggest a 2.1 percent growth rate this year. The surveys, which include consumer sentiment, small business confidence, and ISM manufacturing, are as bullish as they have been in ten years. Overseas economies, after a year of false starts, appear poised to emerge from the doldrums, which would incrementally boost US exports.
Perhaps the polling, as was true before the presidential election, does not reflect the broader national picture. The survey participants might be weighted toward consumers and businesses more positively inclined toward believing in the imminent benefits of President Trump's initiatives. However, it seems highly unlikely that survey takers are more prone to misrepresenting their sentiment or their business plans than they have been in the past. The strong ISM manufacturing survey results were, in fact, confirmed in the most recent production jobs report shown below.
Adding further complexity, first quarter GDP predictions have been notoriously imprecise over the past few years, in part because of residual seasonality that remains after the BEA makes adjustments. Another contributor to the disconnect is that GDP forecasts are based on backward looking data and surveys are forward looking. At critical times of inflection, we might expect to see this type of widened gap right before the slope of both lines start to move in the same direction. Mounting evidence points to the GDP line moving at a steeper incline than previously expected.
Which leads us to appreciating how the data flowing from the spigot over the next few weeks will be very helpful. For example, Costco reported a very strong 7 percent growth in U.S. comparable store sales. I read this as positive about the economy as consumers may finally be picking up their spending. Since 2010, the domestic economy has added over 15.5 million net new jobs, or nearly 2.6 million on average for the past six years. It follows that we should see that reflected in sales somewhere.
Retiring Fed governor, Dan Tarullo, in a recent interview with CNBC, sounded as bullish about the U.S. economy as a veteran of the no-affect school of Fed-speak could be. The lower non-farm payroll numbers released Friday do not derail this thesis; the bad weather in March could have played havoc with new employment numbers.
We will need companies reporting first quarter earnings to offer encouraging guidance about the remainder of 2017 for economists and market watchers to move their own numbers higher. By the end of April, data crunchers will be in heaven and one team in the tug-of-war between low growth malaise and a pick-up in GDP will declare victory. I am no sucker for making predictions, but I will give you one clue: When a retailer like Costco announces a strong monthly comps, it's a good sign for the economy.
Commentary by Karen Firestone, chairman and CEO, Aureus Asset Management.
Disclosure: Aureus owns Costco stock
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