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Hedgeye 101: Here's Why the U.S. Economy is Accelerating - kinderga macro

The U.S. economy is heating up. Since the bottoming of U.S. growth in the second quarter of 2016, the economy rebounded from 1.3% year-over-year growth to 2.1% in the first quarter of 2017. We see this up-trend continuing throughout 2017.

(In the video below Hedgeye CEO Keith McCullough explains our call on U.S. growth heading towards 3%.)

Evidence? Just look at recently released data from Durable Goods to Capital Goods (both of which hit a 33-month high recently) to Corporate Profits.

There's more. On Monday, June ISM Manufacturing data provided the most recent update on the state of the U.S. industrial economy. The headline data hit a 35-month high. Here's the breakdown:

  • ISM Manufacturing added +2.9 points on the headline, a 35-month high of 57.8.
  • New Orders re-breached the 60-handle, up +4 points to 63.5.
  • EmploymentBacklogs and Export Orders all gained.
  • Meanwhile, the disinflationary impulse continues with Prices Paid down -5.5 points to 55.00.

That last data point, on "prices paid" declining, is important. Inflation cooling off is actually an additional boon for U.S. growth.

Hedgeye 101: Here's Why the U.S. Economy is Accelerating - ism manu 7 5 17

Inflation ↓ = Growth ↑

Inflation is slowing. Market-based measures all point to deceleration. Consider the 5-year-5-year forward breakeven inflation rate (a measure tracking inflation expectations embedded in Treasury bonds) which has declined year-to-date from 2.06% to today's 1.83% or the CRB Index's, an index that tracks 19 different commodities, -9% decline year-to-date.

Falling inflation has been a macro theme of ours for some time now. It's also an additional catalyst for the U.S. economy to grow. Here's more from Hedgeye U.S. Macro analyst Christian Drake in today's Early Look:

"PCE inflation slowed to +1.4% Y/Y from 1.7% Y/Y in May while Core PCE Inflation (the Feds preferred read) slipped -10bps to +1.4% Y/Y, marking a 4th month of slowing off January’s high of +1.78% Y/Y.  With price growth across shelter, medical, food, energy and wireless service all decelerating, cost pressures across key consumer expense buckets is ebbing at the margin.  The Chart of the Day below captures the simple implication.  It’s from our 3Q Macro themes presentation and was designed to provide some cerebral relief amidst the analytical drudgery surrounding."

In short, inflation subtracts from U.S. growth. If inflation is slowing, less will be subtracted from GDP figures. As we've clearly shown, U.S. economic data is also accelerating. Taken together, we're very comfortable with our call that the U.S. economy is accelerating.

See Kindergarten Macro below...

Hedgeye 101: Here's Why the U.S. Economy is Accelerating - CoD Kindergarten Macro