Astonishing New GDP Forecast as Economy Accelerates

By Greg Valliere
Horizon’s Chief Global Strategist

June 4, 2018
SICK OF TRADE DISPUTES AND THE RUSSIA PROBE? Well, they’re not going away – but there’s a potentially bigger story for the financial markets: the dramatically re-accelerating U.S. economy, poised to grow by 4% or perhaps even more in this quarter.

THE ATLANTA FEDERAL RESERVE’S CLOSELY WATCHED “GDPNow” report exploded last week after the release of strong retail sales and employment data. The current forecast is for second quarter growth of 4.8% !! Few private analysts are that high, but several respected firms like Macroeconomic Advisers are now at 4% for this quarter. Stronger consumer spending and improved business fixed investment – fueled by massive fiscal stimulus – are cited in these new forecasts.

WE’VE BEEN WRITING SINCE WINTER that the biggest risk to the U.S. economy is over-heating, and that’s now a major concern – despite uncertainty over trade policies, high consumer debt and the dreary economic climate in the U.S. farm belt. Even with these drags, GDP growth of 3% or better is likely in the second half following an astonishing spurt in this quarter.

THE DARK CLOUD: There has to be something to worry about, right? The rapidly tightening labor market is becoming a major concern, as employers complain that they cannot find skilled labor – or, disturbingly, enough workers who can pass a drug test. In many regions of the country – the West Coast and the Southeast in particular – the labor shortage is particularly acute.

SO PUT US IN THE CAMP THAT WORRIES that the Federal Reserve has a lot of work to do. The Fed will soon get to its target of 3% wage growth; it’s 2.7% year-over-year now, and labor costs surely will rise as the unemployment rate drops to 3.5% by fall. A rate hike at next week’s FOMC meeting is now certain, and the likelihood of two more moves in the second half, not just one, has increased.

HOW’S THIS FOR AN IRONY? Growing market anxiety over tariffs initiated by Donald Trump may keep a lid on interest rates, as nervous investors continue buying Treasuries as a safe haven against his ill-advised trade policies. Talks in Beijing this weekend were unsuccessful, and an icy chill is likely in Quebec late this week as the G-7 convenes. This is a climate that would seem to favor safe havens like Treasury paper.

GLOBAL ECONOMIC GROWTH, especially in Europe, seems to be softening as trade anxiety rises, still another reason to believe that interest rates won’t blast off. The dollar may be another story, as the roaring U.S. economy contrasts with mediocre growth elsewhere.

THE ECONOMIC SURGE AND THE ELECTION: In this intensely political city, a major issue is what a 4% growth rate could mean for the fall elections. We’re still betting that pocketbook issues will prevent a Republican debacle this fall; the GOP is likely to keep the Senate and the Democrats’ chances of taking the House have gone from very good to simply good.

NO QUESTION – THE MOST MOTIVATED VOTERS this fall will be women, people of color, young voters, etc. – but this still doesn’t look like a tidal wave election to us. Maybe a high surf warning for the GOP because of public antipathy toward Trump – but a tidal wave election still looks unlikely because 4% economic growth will lift a lot of boats.