Better Than Expected
The past couple of weeks we have reported that the economic numbers have been better than expected. We received confirmation of this last week when the GDP report came out. The GDP was 3.2% for the first quarter of 2019. This was the best first quarter GDP in 4 years, since 2015. It also gives us indication that we need to temper talks of slowing global growth.
Exports and Inventory Growth
The GDP number was great but there were a couple things that we looked at more closely. If you dig a little deeper, all that growth in the first quarter came from the more volatile categories. We are talking about the things that can swing the most and are harder to predict. The first one is net exports. Net exports added about 1.03% to that reported 3.2%. The second thing is inventory growth and the third thing is state and local government. It’s great to have a quarter like we did in the first part of the year, but you must be careful because a lot of that number was a result of more volatile categories. The positive part of that is that the consumer and auto sales were low for the first quarter. The government shutdown drug about 0.3%. What’s potentially good for the rest of the year is the possibility of the consumer and auto market coming back up. Also, the major federal government coming back can give us more reliability and more sustainability. So, we could continue to have good numbers for the rest of the year on the things that are not as volatile as they were in the first quarter, especially the inventories.
Watching the Fed
The Fed will have a meeting this week and so far, this year, the Fed meetings haven’t caused any issues. At the end of last year the Fed was too aggressive and then quickly realized that they needed to back off and for the rest of the year they decided to be more dovish and not raise rates. That decision was on the assumption that the first quarter would be weak. The first quarter ended up being much stronger so will the Fed react to that and be a little less dovish and more aggressive and raise rates again or will the theory that they may cut rates come true. A lot of assumptions about how the Fed is going to talk and act this week were built on a 1.5%-2.5% GDP. The GDP number being 3.2% is way above what the Fed was predicting so we will see if that changes the way they look at the economy. The markets in the fourth quarter of last year were extremely reactive to every word the Fed said. Will we see that come back this week? One good thing about it this time is that core inflation is still low. That volatility that we just talked about were within some of those extraordinary categories, but it didn’t hit inflation. We had growth but not much core inflation which might help. We are still in a Goldilocks state where we are getting growth but no inflation. The Fed is supposed to fight inflation. Last year we had the same argument with the Fed, that they were fighting a battle that they had already won. Hopefully they learned their lesson from last year.
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