Candy Corn is not a Vegetable

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We all know candy corn is mostly sugar. Investors may be worried about the robust economy running on a sugar high of tax cuts; after all, a sugar high usually ends with a crash. The latest GDP report of 3.5% growth in 3Q18 was better than expected, however, and was the fastest back-to-back quarterly growth in four years. We believe growth for full-year 2018 is firmly on track to reach 3%. Consumers were particularly sturdy during the quarter. Businesses struggled with the heightened risks in the trade tariff landscape; as a result, business investment (capex) faltered a little but was up a solid 6.4% year-over-year. Capex is important because it must increase in order to boost productivity and future growth.

Inflation moderated despite the strong GDP numbers. The PCE Index — an important inflation gauge for the Federal Reserve — moved back to 1.6%, below the Fed target of 2% and down from 2% last quarter. The economy is not at risk of overheating.

GDP details from Cornerstone Macro:

1. Capex was weak, but is likely to reaccelerate into 2019, i.e., 3Q18 was more noise than signal. Within capex, information processing investment was soft, as were structures, but industrial equipment and intellectual property investment were strong
2. Consumer spending was strong across the board. There might be a slight shift down in 4Q18, but the first half of 2019 could be supported by a significant shift up in tax refunds
3. Trade was a drag but inventories were an offsetting boost. Looking ahead, trade likely will continue to be a drag, but probably not as much as it was in 3Q18; inventories will stop being a boost
4. Housing was weak, but we believe it should pick up somewhat
5. Government spending will continue to support growth, reflecting the stimulus from April’s budget deal

Please follow GDP on page 71 of the Global perspectives Book.

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