What Today’s GDP Report Really Means

The Q4 2018 GDP report finally came issuing this morning — one month behind schedule.

Like harvest time after a dry season, economists feared the fourth quarter would yield a lean crop.

November–December retail sales endured the largest monthly drop since September 2009.

The government “shutdown” would throw additional drag upon the gross domestic product.

Consensus estimates centered around 2.0% fourth-quarter growth.

Then at 8:30 this morning, word came down…

And the result?

One more reason you cannot trust the experts — Q4 GDP expanded a defiant 2.6%.

Still less than Q3’s 3.4%… but a good sight better than 2.0%.

Year over year (Q4 2017–Q4 2018), GDP expanded 3.1% — the most since 2005.

But at 2.9%, calendar year 2018 growth fell slightly short of Trump’s 3% goal line.

It nonetheless remains the strongest year since 2015.

Beholding a glass half-full is Avery Shenfeld of CIBC Economics:

U.S. fourth-quarter GDP was not bad, not bad at all, considering all the fretting about a slowdown that dominated the news flow during the quarter. The 2.6% annualized pace was about a half point above our forecast and the consensus…

How did the markets take this morning’s GDP report?

Precisely as you would expect — not as you would expect.

The three major averages opened the day in red numbers… and remained in red numbers clear to the closing bell.

The Dow Jones ended the day 69 points lower. The S&P lost eight; the Nasdaq, 22.

Why no bounce?

News on the geopolitical front heaved the wet rag upon markets.

In Hanoi, President Trump called a halt to nuclear talks with North Korea’s Kim Jong Un.

Kim evidently failed to meet Trump’s demands for full denuclearization before the U.S. lifts its sanctions.

“Sometimes you have to walk,” concluded the American president, in resignation.

“Collapse in negotiations with North Korea seems to be weighing on sentiment to some extent,” says Scott Brown, chief economist at Raymond James.

But to return to today’s GDP report, let us point to the glass half-empty…

It is true, today’s numbers exceeded expectations — but they nonetheless continue a downturning trend.

Each of the past two quarters put up lower numbers than the previous.

And much of last year’s “stimulus” has run its course. No new tax cuts are in prospect.

Many crystal gazers expect Q1 2019 GDP to come in below 2%.

IHS Markit, for example — a regarded outfit — now estimates Q1 growth at 1.1%.

Macroeconomic Advisers have also slashed their Q1 estimate to 1.1%.

Yes, the experts botched their Q4 reading. But is there reason to believe the present quarter will surpass the last?

Argues Lewis Alexander, chief U. S. economist for Nomura:

The economy’s already slowing and there are a bunch of reasons why it could slow down even more, and that just makes you vulnerable. It would take less of a shock to push you over the edge [into recession].

Meantime, the Federal Reserve itself projects 2.3% growth for the year — a good jump down from 2018’s 2.9%.

And it projects long-term growth at a weak and wan 1.9%.

We argued recently that growth would continue to wallow without increased productivity.

Productivity growth averaged 4–6% for the 30 years post-WWII.

But it has languished between 0–2% since 1980.

Meantime, labor productivity averaged 3.2% annual growth from World War II to the close of the 20th century.

And since 2011?

A mere 0.7%.

Like an overloaded pack horse groaning under the load, we contend the economy cannot go much anywhere because of its vast debt load.

In 1970 — the year before Nixon snipped the dollar’s final tether to gold — public debt totaled $275 billion.

Or in today’s dollars, $1.2 trillion.

U.S. public debt today rises above $22 trillion… and swells daily.

GDP has increased 35% the past decade. But the national debt… 122%.

And the Congressional Budget Office estimates debt is expanding at a 6% annual rate.

Meantime, average real annual economic growth since 2009 runs to 2.23%.

Before 2009, the trend since 1980 had been 3.22%.

And as Jim Rickards explains:

“A society that grows at 3.22% will be twice as rich as one that grows at 2.23% over the course of an average lifetime.”

Productivity is the answer.

Michael Lebowitz of Real Investment Advice:

“Given the finite ability to service debt outstanding… future economic growth, if we are to have it, will need to be based largely on gains in productivity.”

Unfortunately, debt is much easier to produce than growth…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning