Growth — It’s Back
Thanks to everyone that came out to the Investor Coaching Event! It was a lot of fun…
I had a great time sharing valuable information with you. We talked a bit about GDP (Gross Domestic Product) and how it is/isn’t related to the stock market. Well, guess what?
Today’s email is about GDP! As I stated, our economy needs to run at about 3% GDP for the economy to grow. While we are still below that, investing in the stock market and Free Markets are stil the greatest path to prosperity!
Guess What? Growth is Back!
The first quarter has come and gone and lots of data have been released. Still, there are pieces of data missing and these missing data points make forecasting GDP treacherous.
Nonetheless, the data we are confident about are consumer spending, business investment, and home building, which appear to have expanded at an annualized real rate of 3.8% in Q1 – the fastest combined pace of growth for these portions of GDP since 2010. In other words, the economy appears to be bouncing back from its weaker Q4. The plow horse economy is starting to trot – at least in the near term.
The other components of real GDP – the ones we are less confident about – such as inventories, government purchases, and trade should pull growth down. Putting it all together leaves us with a forecast of 3.1% annualized growth for real GDP in Q1.
To put this in perspective, just a few months ago, the consensus forecast for Q1 was 1.5 – 2%. The consensus was fretting about the payroll tax hike and the federal spending sequester. (We were forecasting 2.5% at the time.)
Now, the consensus is forecasting about 1.5% growth in Q2. You guessed it, they think the economy will be hit with a delayed response to the fiscal cliff. As usual, we are not as dour and are forecasting another 3% for Q2.
Let’s be real – it’s still not the 1980s and 1990s, when government was shrinking. But 3% is nothing to sneer at. Monetary policy is loose, housing is rapidly recovering, Corporate America has high profits and strong balance sheets, and entrepreneurs are innovating at a breakneck pace.
Add-em-up and you get 3.1% real GDP growth for Q1, not the start of an economic boom, but far from the recession the pessimists have been warning us about the last few years.
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist
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