Global good, encouraging employment and flat fears

GLOBAL GROWTH

The IMF estimates advanced economies will grow 2.5% in 2018 and 2.2% in 2019, up half a point each from their 10/17 report. US growth was boosted from 2.3% to 2.9% this year and 1.9% to 2.7% for 2019 due to powerful temporary fiscal stimulus. The IMF also noted that longer-term prospects for advanced economies are sobering given aging populations, weak productivity growth, high debt, possibly reduced trade and more.

PLEASANT PERFORMANCE

Real GDP in 18Q1 grew at an annualized rate of 2.3%, beating expectations of 2%. This was the best Q1 growth since 2015 and keeps us on track for growth of at least 2.75% in 2018. It slid from 2.9% in 17Q4 due to post-hurricane declines in car purchases and home repairs. Growth was buoyed by business investment in equipment (now enjoying very favorable tax treatment), non-residential structures, and inventories.

WINNING WORK

April’s employment numbers were good. The unemployment rate fell to 3.9%, its best rate since 12/00, and the broadest measure of unemployment fell to 7.8%, best since 12/01. Yet wage growth was unchanged from earlier months, easing fears of inflation. And, that’s surprisingly good because job growth of just 164,000, and the upward revision of 32,000 to just 135,000 for March, suggests a labor market slowly running short of workers.

DOUBLE DEFICITS

The recent tax cuts and spending increases will push up business and household spending, which will necessarily boost imports, which in turn will hurt our trade deficit. At the same time, these policies will also widen the budget deficit. And, looking back in history, every $1 billion rise in the budget deficit leads to the trade deficit increasing by $350 million. So, expect the trade deficit to worsen.

SOLID SPENDING

After declining 0.25% in December, 0.68% in January, and 0.23% in February, inflation-adjusted retail sales jumped 0.62% in March and are now, solidly back at trend growth. Moreover, because those months are volatile, looking at Y-o-Y growth is preferable. Y-o-Y real retail sales growth troughed in 5/16 and have steadily risen since and are now solid at 2.1%. Low unemployment, good consumer confidence and tax cuts should keep it going.

FLATTENING FEARS

The flattening yield curve, or the declining differential between long-term and short-term rates, is giving many heartburn. Since 1970, every time it’s inverted (and short rates have exceeded long rates), a recession has followed. Are we near a recession? Very unlikely! The current flattening suggests nothing more than continued short-end Fed rate hiking, little inflation expectations, and slow long-run growth due to weak population and labor productivity increases. Chillax.

Source: Elliot Eisenberg, PhD., Chief Economist for GraphsandLaughs, LLC, an economic consulting firm serving a variety of clients across the United States. All rights reserved.

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