Growth is Good

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China and India are growing rapidly, and China is second only to the U.S. in total economic output, while Germany’s export-driven economy is the runaway eurozone leader.

Many headlines classified Q1 GDP growth of 2.3% as ‘slowing’, but in fact, it was stronger than expected (2%), and will the economy pick up enough before the Fed shuts it down will be the tale of the tape this year and next. The four-quarter moving average of GDP reached 2.9%, continuing to build from the anemic 1.2% average ending Q2 2016. Gross private fixed investment reached 4.6% on a four-quarter moving average basis, up from 0.1% in Q3 2016 – and that is before the tax incentives hit in 2018. Consumption was stable at 2.7% on a four-quarter basis.

Perhaps a sign of confidence in the outlook, the personal savings rate continued to ebb around 3% from 6% in 2014-16. Consumers spend from their permanent incomes and from their targeted net worth. The healthy labor market (claims at a near 50-year low) and with household net worth rising are reasons enough for consumers to relax. Household net worth as a share of household income is at new record levels. Most observers on the outlook remain confident, as do I: thus far, there has been the makings of an investment rebound in the (albeit early in the process) recent data. Durable Goods were up some 9% YoY in February, factory orders were up 7.1% in February YoY, factory orders ex-transport were up 6%. Importantly, orders have been translating into shipments, with capital goods (non-defense-ex aircraft) up 9.7% YoY in February. The consensus for Q2 is heading towards 3%, with a possibility for a 3% full-year 2018. Sad to say, the U.S. economic juggernaut has not grown by 3% in a calendar year since 2005, but we are seeing the makings of a turnaround. As a reminder, the U.S. economy averaged 3.2% annual growth over the 1985-2005 period.

For more on GDP growth in the U.S. and around the world, check out page 56 of the Global Perspectives book. You can also see the long-term U.S. growth trend on page 70. - Special Guest Blogger: Tim Kearney, PhD

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