The top-line Gross Domestic Product (GDP) number came in for the second quarter last week, and it beat most analysts expectations with a resounding 4.1% of growth reported.
US GDP growth under President Trump so far has been below average – for Reagan standards – but extraordinary as compared to the economic numbers since the post-2008 crisis. Furthermore, the growth has been more reflective of actual business activity – job hiring, business expansion, sales and wage growth – as opposed to government debt and banks buying and selling one another’s own stocks with borrowed federal dollars.
As we have commented in these blogs many times: GDP growth based upon business expansion is “real” GDP growth; growth based upon zero interest rate policies and banks borrowing funds to buy other bank stocks – that is “artificial” growth.
Artificial growth still drives paper assets and markets, so your 401(k) will certainly benefit. But you will not – and did not – see wage growth, employment growth, or real capital investments and marketplace expansion. Therefore, growth fueled by monetary policy will be anemic, and it will be deleveraged at some point in the future.
Many analysts are claiming this is a “one-off” and 4.1% cannot be sustained. The evidence they use is a surge in soybeans and other products above the year-over-year numbers as suppliers are afraid of Chinese retaliatory tariffs. (This evidence is substantial: last year’s soybeans sales increased 4.8% in the second quarter… this year was a record-setting 29% increase in sales). But such anecdotal data ignores the larger trends and off-setting data, such as potentially increased soybean sales to Europe in the next quarter as part of a larger EU/US trade negotiation.
So, what are the primary reasons for optimism that 4.1% growth is just the beginning of great things to come:
Top 5 Reasons 4.1% GDP Growth Could Be Just the Beginning:
- “Energy stocks did well in second quarter”: Headlines included “Energy stocks put up blowout numbers in second quarter” (CNBC) and “Energy topples tech as top sector” (Wall Street Journal) rippled across the media as the second quarter drew to a close. The irony being that higher oil prices – typically bad for the consumer – can also provide at the same time positive signals, such as growing demand and stock appreciation for energy companies. Gas prices can dampen consumer sentiment, but we are not at that inflection point. The inflection point we are staring at is rising consumer demand, rising energy output, and rising valuations for energy stocks. That is the win-win sweet spot which can give market watchers optimism in quarter number three.
- “Wages had their largest increase in over a decade”: Keynesian followers who regularly preach in the media the “secular stagnation” argument harken back to the 1970’s to claim that as the last period the American worker saw an actual increase in wages. This is, of course, untrue. But, it does not mean that American workers rightfully recognize that their dollar does not stretch as far as it used to, and it has been more painful and difficult to “get by” as a middle-class family. But at the end of June real wages had risen by 2.8%, their largest such increase in over 10 years. (US Dept. of Labor; BLS) Simply put, most people made more money and had more disposable income in their pockets. Those are real world numbers with a real-world impact – wages outstripping inflation. This is strong data to support an ever-expanding GDP number moving forward.
- “Tax-reform has worked and is working”: Case in point #4 above. Make no mistake, tax reform has allowed companies to pay workers more, to hire more workers, and to invest in capital expenditures. We would have preferred flatter rates, combined with government reform needed to bring down spending. But the basic, fundamental expectation of tax reform was to free up capital and labor for business expansion. That did, and has, worked, and the after-effects are just now rounding into shape. Tax reform will continue to increase GDP numbers for the remainder of the year.
- “De-regulation continues”: Just one word, a hyphenated word, but one word can best describe the mountains of cash companies have made in their earnings reports, and are bringing home from overseas, and in monthly increases in consumer spending. The repeal of Dodd-Frank empowered small regional banks to start lending again. Energy – the most dynamic and vibrant of all sectors of the economy through the second quarter, greatly benefitted from deregulation and the lifting of drilling restrictions. You could almost say “it’s morning in America again!” If large sectors of the economy are free from government intervention, then this will keep the upward GDP momentum going.
- “Consumer confidence is driving business sentiment”: There will be no greater driver of continued GDP growth for the remainder of 2019 than business sentiment. Whether to invest in capital, invest in new hires, increased wages, inventory expense, business expansion…..all is driven by what the business owner believes is waiting for him/her in the future. Consumer confidence was up in the last quarter, and that was seen in the retail sales number. If sales are up, business sentiment will be up, that is the business cycle in micro form. If businesses are feeling good, expect a good second half to 2019.
Trade conflict and foreign policy concerns could derail upward GDP numbers, as could a negative outcome from the Mueller probe. Inflation and gas prices can move beyond the inflection point and begin to damage consumer pocket books. But our top five reasons are strong indications that GDP growth could easily top the 4.1% mark we saw in the second quarter as we move towards the end of 2018.
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