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Predicting U.S. GDP - Perhaps 2% So No Interest Rate Change

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Includes: SP500
by: Tim Worstall
Tim Worstall
Tech, banks, gold & precious metals, natural resources
Summary

We have some of the advance numbers that will make up U.S. GDP later when the main figures arrive.

These indicate that GDP is going to be in the 1.9% to 2% range. About what we think the potential of the economy is at present.

This means that the Federal Reserve simply isn't going to be changing interest rates any time soon. Steady as she goes that is.

We'd like it to be be better but it ain't

We would of course rather prefer that the US economy was growing at 3 and 4%. Partly simply because we'd all like to be getting richer collectively, perhaps more importantly because that sort of rate of growth makes our job as investors a great deal easier.

The problem we've got is that no one thinks that the US economy can grow - real growth, not nominal - at that rate sustainably. The structure of the thing means that if we were motoring along at that speed then we'd soon enough be in the car crash of either inflation or a recession induced to prevent such inflation. The way we've got things set up just doesn't allow that sort of rate of growth.

Thus monetary policy, the stuff the Federal Reserve is responsible for, is limited to doing as well as we can within this structure. Trying to make sure that unemployment is at a minimum, inflation kept to target of about 2%.

The Fed has said that providing growth continues as it is - about this 2% real growth - and inflation does not surprise on the upside then they're going to stick with monetary policy as it is.

So, we've got a metric by which we can consider whether interest rates are going to change. If growth continues at about this 2% level then no change. If it rises well above this we might see rises to cool it, if well below then cuts to stimulate.

The advance information we're getting at present shows that we're about on target - thus expect no changes in policy.

Advance trade

We've got the advance trade numbers:

The international trade deficit was $63.2 billion in November, down $3.6 billion from $66.8 billion in October. Exports of goods for November were $136.4 billion, $0.9 billion more than October exports. Imports of goods for November were $199.6 billion, $2.7 billion less than October imports.

Or:

Trade(US trade balance from Census)

The way that GDP numbers work a reduction in the trade deficit is an addition to GDP. Yes, obviously, this isn't quite how the real world works but it is how these numbers do. So, we can see a small addition to GDP there.

Inventories

In the same report we get advance inventories:

Wholesale inventories for November, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $674.7 billion, virtually unchanged (±0.2 percent)* from October 2019, and were up 3.2 percent (±1.2 percent) from November 2018.

..

Retail inventories for November, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $661.9 billion, down 0.7 percent (±0.2 percent) from October 2019, and were up 2.4 percent (±0.5 percent) from November 2018.

We don't, and shouldn't, worry too much about minor monthly changes in these numbers. We're talking about measuring the balance of large numbers here, some statistical blurring at the edges is inevitable. We do pay attention more to the annual numbers. And inventories are rising about in line with the economy itself which is what they should be doing.

We've not got some horrible fall as producers worry that people are about to stop buying so they pull back. Nor do we have a buyers' strike happening meaning that inventories balloon out. We're fine with these numbers.

inventories(US inventories from Census)

However, not all is good

We do have evidence of something going a little wrong in the US economy though. Contrary to what many think trade is just economic activity that happens over the borders of the country. In economic terms there's actually no difference at all, the division is purely a political one.

We like more economic activity, that's what GDP (or perhaps GNP more accurately) is and it's also what makes us collectively richer. So, if we've a decline in economic activity then we're not, or shouldn't be, happy.

Which gives us that slight problem. Because we're recording a smaller trade deficit as an addition to the economy. But if it's happening because there is just less trade overall then we've got a smaller economy, not a larger one. That's not a good outcome. That does seem to be what's happening here, the trade deficit is falling simply because we're getting less trade overall. From the detailed figures. Exports are down 1.5% over the past 12 months, imports down 5.6%.

Sure, that's a reduction in the trade deficit because imports are falling more than exports. But it's also an overall reduction in economic activity - not what we want at all. This is going to be a long term problem if it persists, even if not as yet something to worry about.

The numbers on the numbers

The implication of these trade numbers is as Moody's Analytics says:

The new trade data provide a little upside to our high-frequency GDP model’s recent estimate that fourth-quarter GDP growth is tracking 1.9% at an annualized rate.

We're right in the middle of what we think GDP potential is.

My view

I worry about that long term effect. But for what we're interested in here the economy is growing at about what we think is sustainable. Therefore the Fed's not going to change their policy stance.

The investor view

We want to know when or if the Federal Reserve is going to change interest rates. Thus we need to monitor the passing economic statistics to see whether events which will make them change their policy are happening.

GDP growth is right in the middle of what we - and more importantly, the Fed - think is sustainable. Inflation is still a little under target. There's no reason for a policy change therefore, thus there won't be one.

I stick with the forecast that there will be no change in interest rates until the summer 2020 at the earliest.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.