GDP Growth Is Probably Weak In Q1

It appears by most accounts Q1 2018 won’t be a great quarter for GDP growth. Keep in mind, the expectations have been high because of the tax cut and subsequent fiscal spending increase. The latest $1.3 trillion budget, which was passed on Friday, has an $80 billion increase in defense spending, which is the largest increase in 15 years, $1.57 billion in funding for a fence at the southern border, $4 billion towards solving the opioid crisis, $10 billion towards infrastructure, which includes improving highways, airports, railroads, bridges as well as funding high-speed broadband development, and $2 billion in funding for mental health and school safety programs. The fiscal spending boost will provide more of an impact to the economy in the final 3 quarters than Q1 because it was just passed.

Understand that the steaks for GDP growth have been raised because of the heightened expectations and the rate hikes. Since the Fed expects 2.7% growth, anything below that pace would be a setback. Before I look at the current data, let’s review what the rest of the year could look like. As you can see from the chart below, the ECRI weekly leading index growth rate ticked down slightly to 5.5%. I consider this good news because the growth rate had been falling sharply in the past 2 months. The improvement from September to January implies the 2nd half of the year should see quicker growth than Q1. This chart should calm anyone down who is panicking about a potential recession because the stock market is down sharply. It looks like the economy will be fine and earnings growth should be strong. An all-out trade war needs to occur to push the stocks into a bear market.

Great Durable Goods Report

The durable goods orders report was spectacular. This further exemplifies that February was a great month for manufacturing even though the rest of the economy was weak. The new orders were up 3.1% month over month. That’s an acceleration from a 3.5% decline last month. Year over year, new orders were up 8.9% which beat last month’s growth rate of 7.1%. Ex-transportation month over month growth was 1.2% which was above last month’s decline of 0.2%. On a year over year basis, this was up 8.1% which beat last month’s 7.1% growth. Core capital goods were up 1.8% month over month and 8% year over year. That was better than -0.4% and 6.2% respectively for last month. Motor vehicle sales were up 1.6% which is very unusual because the segment has been in decline. If the strength continues in March (which might be unlikely because of the 4 nor’easters), GDP growth might come in better than the Atlanta Fed’s estimate which I’ll review later in this article. Orders for primary metals were up 2.7%. This might be because the tariff news has cause prices for steel and aluminum to increase.

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