The “One-Step-Forward, Two-Steps-Back” Economy

The economy has been trapped in a one-step-forward, two-steps-back cycle.

It has been an economy of false starts… false dawns… and false promises.

Third-quarter 2017 GDP expanded at a 3.2% annualized rate — its best quarter in two years.

One step forward.

A Bloomberg survey of economists predicted another 3% annualized expansion for last year’s final quarter.

Another step forward, that is.

As recently as yesterday Bloomberg informed us:

“U.S. Heads for 3% Growth Trifecta on Spending, Investment Punch.”


Tax cuts championed by President Donald Trump have fueled expectations of an extended boom in capital spending and buoyed household confidence… The U.S. economy probably ended last year with the longest stretch of 3%-or-better growth since 2005.

“Probably” — did you catch that?

As it happens, the Commerce Department released Q4 2017 GDP this morning…

Did it meet economists’ expectations?

The answer is so obvious… we’re almost too embarrassed to answer.

Fourth-quarter GDP enters the log books not at 3%… but a disappointing 2.6%.

Yahoo Finance by way of confirmation:

Gross domestic product rose at a 2.6% annualized rate after 3.2% in the prior period, Commerce Department data showed Friday in Washington. The median forecast in a Bloomberg survey called for 3%.

Two steps back.

Or in the spirit of generosity, perhaps the economy only took one step back last quarter… or none at all.

We are reliably informed that consumer spending rose 3.8% — the healthiest clip in at least a year.

We are further informed that business equipment investment expanded at the quickest rate in three years.

Can we therefore expect the economy to advance a step this quarter… another step next quarter… and another the following?

It’s possible, says Jim Rickards — but with a catch:

Yes, Jim concedes, “the tax cut may produce a sugar high in 2018.”

But the false euphoria of hyperglycemia is… fleeting:

We are already in the ninth year of an expansion, and the U.S. debt-to-GDP ratio already exceeds 105%. In those conditions, added deficits resulting from a tax cut are more likely to slow growth or even produce a recession than they are to support growth. In short, the tax cut… is likely to be a major drag on growth in 2019 and beyond.

See below for more.

If today’s GDP reading failed expectations, the stock market seems remarkably well insulated from the news…

All three major indexes were up this day… and not by a little.

The Dow rose 223 blissfully unaware points by the closing bell. The S&P rose 33; the Nasdaq added 94 points of its own.

Gold, we note, closed $14 lower.

In the days of old a disappointing GDP report might have given markets hesitation… frightened the horses a bit… raised a caution flag or two.

But we live in a new world nowadays, brave or no.

A fellow can no longer find his bearings.

The old road signs that used to point south… now point north.

Or east. Or west.

No one really knows.

True north is false… and the illuminating pole star is obscured by clouds.

No, it appears markets now live in a geography, a dreamscape, of their own creation.

We’ve concluded that stocks are in the early rounds of the dizzied “melt-up” phase…

When stocks rise… and rise… and rise again.

As Pie Funds chief executive Mike Taylor notes, “That’s exactly what’s happened since late last year and moving into this year — they are literally melting up.”

Gabriel Sterne is chief macro strategist at Oxford Economics.

By his reading, “We think 2018 is the year of melt-up rather than meltdown.”

By most estimates, this melt-up can last anywhere from six months… to two years.

It is also when investors can make their fortunes, in the markets’ incandescent extreme.

The boozy party may be just getting underway, as it may run two years yet.

We cannot tell you when it will end, of course.

But if you’ll allow us this one brief word of advice:

Don’t stray too far from the exit door…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning