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"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," wrote Hedgeye CEO Keith McCullough following last week’s first quarter U.S. GDP report. Case in point, here’s the takeaway from the mainstream media on Friday: US GDP “collapses” to 0.7% quarter-over-quarter, “the lowest number in three years with the worst personal spending since 2009.”
The media is focusing on the wrong GDP measure...
These headline quarter-over-quarter annualized numbers are useless. Instead, the year-over-year growth in GDP shows the big picture. On that measure, US GDP decelerated modestly from 2% year-over-year growth in the fourth quarter to the first quarter's +1.9%. That's no collapse.
Digging beneath the surface of Friday's GDP report showed an entirely different picture than that put for by the media. An inflation proxy, the GDP Deflator, subtracted a substantial amount from first quarter economic growth, writes Hedgeye CEO Keith McCullough in today's Early Look. "The GDP Deflator (a proxy for inflation) came in at its highest level since Q1 of 2012 = 2.3%," writes McCullough.
Obviously, we're already well into the second quarter. Critical context for investors is understanding our call on Reflation's Rollover. We say the peak in inflation is in. It's already happening, the Consumer Price Index (CPI) slowed from a five-year high of 2.8% year-over-year in February to 2.4% in the March data reported a few weeks back.
As inflation continues to fall that will be net positive for U.S. growth as the GDP deflator is less of a drag on the economy. “It's the second quarter now obviously and we always had Q1 as our lowest quarterly forecast of 2017,” McCullough wrote. “The second, third and fourth quarter are set up to accelerate further.”
Consumption 'Worst Since 2009'?
On consumption, the supposed "worst personal spending since 2009" is another inaccuracy related to anchoring on flawed quarter-over-quarter annualized numbers. As you can see in the Chart of the Day below, consumption growth only slowed from +3.1% year-over-year in Q416 to +2.8%.
As Hedgeye U.S. Macro analyst Christian Drake wrote last week:
"Consumption growth in this morning’s GDP release was less remarkable than the headline (i.e. QoQ %/GDP contribution) as it only decelerated -30bps on a YoY basis …. and improving income growth should continue to support household consumption capacity over the nearer-term."
Drake's analysis shows a chart of aggregate private sector hourly salary and wage income growth, which rebounded to 6% year-over-year recently.
What the Media Missed
As we've shown in this post, the evidence put forth by the mainstream media has missed rebounding U.S. growth. We focus on year-over-year data because it captures the market-moving trend in the economy. There's been a clear acceleration in this measure from the second quarter 2016 low of 1.3% year-over-year (see above) versus fourth quarter and first quarter growth of 2% and 1.9% respectively. U.S. economic growth is picking up once again.
The takeaway: Don't fall prey to click-bait. Fear sells. Always has. Look no further than Zero Hedge. “They generate money because you click on their fear-based advertising model. You can look at that all day long and get scared out of your mind,” Hedgeye CEO Keith McCullough said on this video excerpt below from The Macro Show.
There's always a bearish data point somewhere. You need a process that analyzes the trend in U.S. growth. The data will set you free.
