The Atlanta Federal Reserve’s GDPNow forecast is currently at +4.6% for the third quarter (Q3) 2018. It always makes me a bit nervous the way people get excited about the Atlanta Fed’s forecast in the middle of a quarter (we’ve got 5 weeks to go).
This forecast will have at least a dozen iterations between now and when the “advance” Q3 gross domestic product (GDP) report comes out in late October. It’s always a very fluid forecast. I feel confident the initial print on Q3 GDP will come in between +3.5% and +4.0%.
S&P 500 Earnings for Q2 are at $160ish on an annual rate. This represents YoY earnings growth of +28% an increase from +25% after Q1. S&P 500 Revenues for Q2 increased at +11%. This is a big deal, as it’s much easier to “massage” bottom line earnings than top line revenues.
The Savings Rate was just revised higher by 3% to 7%.
Credit Spreads, which typically lead GDP by at least 1 quarter, remain very narrow. Consumer Net Worth is Expanding. Historically, consumer net worth has a 2-quarter lag on GDP growth.
Business Investment and Spending is very likely to increase. This will be supported by expanding earnings, lower taxes, and corporate dollars coming back to the U.S. from repatriation.
Now, there has been occasional banter over the sustainability of this economic expansion, and whether we are 12 to 18 months from the next downturn, recession. The historical comparisons for this say otherwise.
Let’s take a closer look at a few key Macro Metrics today, and where they were just before the last recession:
|Fed Funds Rate||6.00%||2.00%|
|FF to 10 yr yield curve||20 basis points||80 basis points|
Despite all the talk about the risks of a flattening yield curve, the very short end of the curve, FF to 2 years, is plenty steep, showing that monetary policy is still quite stimulative.
While in 2000 the recession was just 12 months out, Key Macro Indicators today tell us we are at least 2 to 3 years from the next economic downturn.