Back to Top

No Convergence Between Hard and Soft Data in Q1 GDP Numbers

Source: Commerce Department, New York Times

Source: Commerce Department, New York Times


Sho Chandra of Bloomberg reports on the Commerce Department's first stab at measuring the growth of the US economy in Donald Trump's first quarter in office.

The U.S. economy expanded at the slowest pace in three years as weak auto sales and lower home-heating bills dragged down consumer spending, offsetting a pickup in investment led by housing and oil drilling.

Gross domestic product, the value of all goods and services produced, rose at a 0.7 percent annualized rate after advancing 2.1 percent in the prior quarter, Commerce Department data showed Friday in Washington. The median forecast of economists surveyed by Bloomberg called for a 1 percent gain. Consumer spending, the biggest part of the economy, rose 0.3 percent, the worst performance since 2009.

US Confidence is Soaring

Source: Bloomberg, The Daily Shot

Source: Bloomberg, The Daily Shot

The conundrum continues. As we pointed out in our Q1 CIO Commentary two weeks ago, there is a wide, and growing gap between consumer and business confidence readings (i.e. soft data; see chart on right), and actual economic performance data (i.e. hard data). Back in mid February, the consensus of economists had forecasted Q1 GDP growth of 2.2%, buoyed by strong confidence readings, but these estimates slowly fell to 1% as weak hard data kept coming. At 0.7%, today's first measurement of Q1 GDP missed this lowered consensus.

However, the stock market continues to take its cue from soft data. But eventually the soft data and hard data will converge — and if that convergence is confidence (soft data) coming down to meet tepid economic performance (hard data), then market valuations will be vulnerable to a correction.

Though the first-quarter figure isn’t a verdict on President Donald Trump’s policies, economists are generally skeptical that growth will reach his goal of 3 percent to 4 percent on a sustained basis. Analysts’ estimates indicate just 2.2 percent to 2.3 percent annual growth through 2019, a tad above the average pace during the almost eight-year expansion.

And here's the rub. Simply put, GDP growth is driven by two things: 1) growth in the labor force, and 2) growth in the productivity of this labor force (see chart below for last 30 years of US labor productivity). On the first component, it's hard to see the US labor force accelerating from here given aging demographics and Trump's crackdown on legal and illegal immigration. Trump's infrastructure and pro-business policies, if enacted, could spur some improvement in labor productivity, but eight years into the economic cycle, it's hard to imagine a significant improvement in productivity. Thus the lackluster analysts' estimates of 2.2 to 2.3 percent annual growth through 2019.

While some of the slowdown may be temporary, inflation is eating into consumers’ wallets. Real disposable personal income rose at a 1 percent pace in the period, the weakest since the fourth quarter of 2013. Even though hiring has been humming along and the jobless rate of 4.5 percent is the lowest in almost a decade, a sustained pickup in wage growth would help boost consumers’ ability to spend. [...] The report also showed price pressures were picking up. The GDP price index rose 2.3 percent in the first quarter. A measure of inflation tied to consumer spending and excluding volatile food and energy costs was up 2 percent, the fastest in four quarters.

4.5 percent unemployment should be generating more wage inflation (i.e. real disposable personal income) than it is. This is another conundrum. Meanwhile, the cost of living is accelerating, driven by higher interest rates and housing costs. Trump's infrastructure and pro-business policies, again if enacted, will likely accelerate the cost of living for Americans. If wage growth does not accelerate soon, it could trigger a consumer-led recession.