Great Expectations for Growth

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Special Guest Blogger: Tim Kearney

The 3Q18 GDP report is due out this Friday (10/26) and consensus expectations are for a 3.4% growth rate, which would be good enough for a greater than 3% year-over-year growth rate. The Atlanta Fed NowCast calls for 3.9% growth in 3Q18, though the New York Federal Reserve sees just 2.1% growth. The Bloomberg Consensus of 76 economists sets the probability of a recession 12 months out at 15%, while the NY Fed’s yield curve only model has moved up to 14.5% over the past year, about the same as Voya’s recession model.

There will be those on the Federal Open Market Committee (FOMC) and elsewhere who will cling to the idea that this is a loose fiscal policy “sugar high,” which shifts GDP up over a couple of years and then sputters back to the “New Normal” growth rate. That is not my scenario, provided we continue to see renewed investment and productivity growth. Note that the World Economic Forum rated the United States the most competitive economy for the first time in a decade. As CNBC reported, “The U.S. was given a competitiveness score of 85.6 out of 100, with its strengths including business dynamism, its labor market, and the financial system.”

As I have been saying for some time now, the key is the evolution of investment spending to raise productivity. The FOMC minutes may reflect the first cracks developing in the New Normal edifice. The minutes noted “A couple of participants commented that recent strong growth in GDP may also be due in part to increases in the growth rate of the economy’s productive capacity…Participants noted that business fixed investment had grown strongly so far this year. A few commented that recent changes in federal tax policy had likely bolstered investment spending.” It appears we are set for some smooth sailing, though along with higher growth come higher interest rates – but for the right reasons.

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