Markets Mistake Statistical Noise for Accelerating GDP Growth
Contrary to the popular view, we believe the data this week showed a stable if not weakening economy.
Seemingly stronger economic data in the middle of this week caused a brief panic in stock and bond prices as investors feared that the odds of a U.S. Federal Reserve rate increase sometime this year had increased dramatically. Markets focused on the first-quarter GDP increase, from 1.1% to 1.4%, some favorable trade data, and a renewed focus on a potential rebound in third-quarter GDP growth to 3% or more.
Although that potential was well-known among economists, the popular press doesn't focus on current-quarter GDP until the final data for the previous quarter is released. The final data for the second quarter was released on Thursday. Even the normally sedate Wall Street Journal chose to focus on third-quarter growth on the front page of Friday's edition, trumpeting the possible third-quarter 3% growth rate as the fastest growth in two years and substantially better than the sluggish first half. However, most of that rebound is related to the fact that inventories are unlikely to hurt GDP in the third quarter after subtracting 1.2% off of second-quarter growth. We view these quarterly ups and downs in inventories as statistical artifacts. We believe the real economy is likely growing 2% or so, with full-year GDP potentially being slightly lower at 1.5%-1.75% as first-half statistical anomalies prove difficult to fully overcome.