With the advent of the Q2 data, U.S. GDP was completely restated and rebased on a historical basis. The beauty of how we programmed model is that it refits automatically and all of the drivers re-weight themselves accordingly. Additionally, the slope of the base effects curve has shifted with the new inputs to the calculus.
The net result of these changes is threefold:
- Our model is getting really good: Recall that we were calling for GDP to come in at +2.36% YoY/+2.41% QoQ SAAR. Once you factor in the rebasing of the Q1 base rate from +2.1% YoY to +2.0%, then our forecast was actually calling for +2.26% YoY growth, which would have imputed a +2.61% QoQ SAAR growth rate. Those figures represent upside deviations of a mere 18bps and 7bps, respectively, from the actual recorded growth rates of +2.08% YoY and +2.54% QoQ SAAR. It’s worth noting that our model’s average absolute forecasting error over the past two years is a lowly 19bps with respect to the YoY growth rate (i.e. the one that our studies conclude is more impactful to financial markets).
- Are we about to have a re-do of the 1998-99 melt-up?: The most critical information contained in today’s GDP release is not a function of the Q2 print itself, but rather the impact of the restatement of the historical figures in terms of rebasing the comparative base. Specifically, base effects now have a clear runway to ease through the 2nd quarter of next year. That means #Quad1 or #Quad2 is the highest probability outcome for the U.S. economy for the foreseeable future. Irrespective of Trump’s failure to advance his economic agenda, the current setup is very akin to the 1998-99 period when the U.S. economy was in #Quad1 or #Quad2 roughly two-thirds of the time.
- Consensus is not prepared for that increasingly probable outcome: Whether you look at Bloomberg consensus forecasts that call for GDP to average a mere +2.3% over the next four quarters (vs. our +3.2%), the massive implied volatility premiums in domestic consumer discretionary stocks, the massive relative implied vol. spreads in domestic technology shares, relatively net short speculative positioning in NASDAQ futures discussed in today’s Early Look, or the simple fact that the QQQ’s keep making new all-time highs on a trending basis, it’s very clear investor consensus is not positioned for the aforementioned scenario. The macroeconomic backdrop supporting our preference to be long of growth in lieu of value in style factor terms and/or consumption and services in lieu of cyclical reflation in sector terms just got decidedly more supportive. Sure, the market may choose to look through the “math gymnastics” underpinning our revised outlook, but that risk is something we’ll have to continue to sequence on a daily basis.
CLICK HERE to download our full visual summary of these important macro drivers, including our updated forecasts for domestic economic growth and inflation through 2Q18E (20 slides).
Viva la bull market,