FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
May 30, 2017
- 1Q GDP Revised Up to 1.2% From 0.7%, Better Than Expected
- Fed’s National Economic Activity Index Hits Three-Year High
- Trump Budget Far From Perfect, Has Flaws, But a Good Start
- Editorial: “Trump’s Growth Budget” by CNBC’s Larry Kudlow
- Keep All Your Financial Information in One Safe, Secure Place
The Commerce Department reported last week that 1Q GDP increased more than previously reported (0.7%) and more than the pre-report consensus (0.9%) to 1.2% (annual rate). While that was better than expected, GDP growth in the 1Q was anemic at best.
Yet a second report last week, the Chicago Fed’s National Economic Activity Index, rose to the highest level since late 2014, well above expectations. This report adds credence to the argument that economic growth is accelerating in the 2Q.
The question is whether the economy is growing by 3.0-3.5% (annual rate) in the 2Q as some forecasters seem to believe, or more like 2.0-2.5% as myself and others find more likely. I’ll give you my thoughts as we go along today.
Following those discussions, we’ll turn our sights to President Trump’s controversial federal budget proposal for fiscal year 2018 which was released last week. The president’s budget proposed lowering the rate of growth in federal spending in many areas, and thus was roundly criticized in the media and by Democrats.
While Trump’s budget clearly has its flaws, it is encouraging to see a president attempt to reduce the rate of growth (not cuts) in federal spending. I’ve included a very interesting article by CNBC’s Larry Kudlow that explains how to view Trump’s latest budget proposal.
1Q GDP Revised Up to 1.2% From 0.7%, Better Than Expected
The Commerce Department reported on Friday that “real” (inflation-adjusted) GDP grew at a 1.2% annual rate in the 1Q, an upward revision from its advance estimate of 0.7% at the end of April. The latest report was better than the pre-report consensus estimate of 0.9%.
Most of the upward revision was due to stronger consumer spending as well as a further increase in business investment since the initial reading last month, while inventories were revised down.
The brightest spot in Friday’s GDP report was that business fixed investment grew at an 11.4% annual rate in the 1Q, the fastest pace in five years. The most disappointing news was that corporate profits slipped 1.9% in the 1Q.
Despite that, corporate profits remain 3.7% higher than a year ago, and much of the weakness in the 1Q was due to an unusually large reduction in the value of inventories which is not expected to continue. As a result, most forecasters expect corporate profits to continue to improve in the year ahead.
Since the economic recovery started in mid-2009, real GDP has been growing at an average annual rate of 2.1%. Most forecasters continue to expect faster economic growth over the next couple of years. Yet not significantly faster until policymakers in Washington, DC start cutting tax rates, reducing regulations and moving toward healthcare reform.
In terms of monetary policy, nothing in Friday’s better than expected GDP report should prevent the Federal Reserve from raising rates again in June. In fact, it would now be a big surprise if Yellen & Company do not raise the Fed Funds rate another quarter-point on June 15. I’ll have more to say about this before the next FOMC meeting on June 14-15.
Fed’s National Economic Activity Index Hits Three-Year High
The Chicago Fed’s National Economic Activity Index rose to the highest level since 2014 last month according to a new report out last week. The National Activity Index includes measures of manufacturing, productivity, factory orders, consumer spending, hiring, incomes, etc.
According to the Chicago Fed, its National Activity Index rose to +0.49 in April from 0.07 in March, its highest level since November of 2014.
The Index is a weighted average of 85 monthly economic indicators with a baseline average value of zero. A zero value for the Index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth (in standard deviation units); and positive values indicate above-average growth.
The fact that this Index rose to the highest level since late 2014 lends credence to the argument that economic growth is accelerating in the 2Q. The question is whether the economy is growing by 3.0-3.5% (annual rate) in the 2Q as some forecasters seem to believe, or more like 2.0-2.5% as myself and others find more likely.
The first official government estimate of 2Q GDP won’t be out until near the end of July, but we’ll get more indications as we move through June. I’ll keep you posted.
Trump Budget Far From Perfect, Has Flaws, But a Good Start
The annual federal budget soap opera has begun with the release of President Trump’s FY2018 budget last week — with many in Congress, as always, declaring it “dead on arrival.” Nothing new there.
The mainstream media declared Trump’s budget barbaric and outrageous, citing hundreds of heartless budget cuts — most of which are actually spending increases but at a slower rate of growth than the so-called “baseline” increases.
There are things not to like about Trump’s budget, on both sides of the political aisle, but there are several areas which deserve praise. In particular are the incentives to get able-bodied Americans off the welfare/dependency rolls and back into the workforce.
Yet rather than give you my analysis of these proposed work incentives and the new budget in general, here’s a good review by CNBC’s Larry Kudlow, one of my favorite writers, which appeared in Investor’s Business Daily on Saturday (emphasis is mine).
Trump Budget is a Revival of the Clinton/Gingrich Growth Mode
by Lawrence Kudlow — May 27, 2017
When OMB [Office of Management & Budget] director Mick Mulvaney unveiled the new Trump budget, he used language that is so important — although we haven’t heard it in so many years.
To paraphrase Mulvaney, the measure of budget success for the Trump administration is not how much federal assistance is given out, but how many people leave government dependency and join the private labor force as full-fledged workers.
Adding up each and every new year between now and 2027, the federal government will spend about $55 trillion. Do we think that’s enough? And the Trump budget would curb that by about 7 percent, or roughly $4 trillion. That’s all that’s happening.
So Mick Mulvaney is right. This is a growth budget. Not because it destroys all federal assistance. But because it will reinstitute reforms put in place by Democrat Bill Clinton that will restore incentives to work and remove incentives to not work.
When people re-enter the labor force, it promotes growth. Workfare is better than welfare. And President Trump also aims for a big-bang growth booster with a cut in business tax rates for large and small companies along with immediate expensing and repatriation.
President is a mighty hard job. Even if he drains the swamp by just a wee bit, President Trump will still shake up the establishment. END QUOTE
As noted above, President Trump’s controversial FY2018 budget has its flaws, not to mention that it is void of any