In large part, 2Q19 was simply a reversal in the dynamics and distortions that characterized 1Q19. Specifically, the 2nd derivative in 1Q19 was almost exclusively a function of fringe dynamics having an outsized impact on the headline as the Trade Balance and Inventories (both of which are discretely traceable to Trade Policy distortions) sat as the primary supports while domestic consumerism slowed amidst residual government shutdown fears, harrowing losses in financial markets and a crescendo in Trade Policy angst. 2Q19 was characterized by the converse…. with a government kicker.
- Distortion Reversal | Trade/Investment: After adding +1.3pts to GDP in 1Q19, Net Exports + Inventories subtracted -1.5pts here in 2Q. Expect the volatility across these metrics to normalize from here as we move past the peak of the inventory overhang and residual trade related pull-forward effects.
- Go Go Gov’t | 10Y Highs: Non-Defense Government spending rose +5% Q/Q, marking the largest sequential gain in 10 years. Political conspiracy theories aside, we knew the government was underspending relative to budget but it was a wild-card as to when and what extent we’d see the deferred spending get onboarded.
- Consumer Spending | “Steady As She Goes:” That was our macro mantra with respect to the near-term outlook for domestic Consumption growth. In other words, given base effect and late-cycle labor/wage inflationary dynamics, Household Spending was not going to be a primary driver of the deceleration in Headline growth, at least not over the next couple quarters. Our view there remains unchanged.
2014-2018 Revisions: No 3% for You!
There were a lot of shifting internals accompanying the latest benchmark revision to the NIPA accounts, but most of what matters can be sufficiently distilled into a few broader, top-down takeaways:
- In Short: On net, the estimate for GDP over the 4Q13-4Q18 revision period was unchanged. However, there were significant shifts in the sequencing of that growth and in the associated expenditure type contributions. Below are the BEA summaries for the total and expenditure type impact of the revision for the full time series along with 2018 and 4Q18 specifically – periods in which the change was particularly pronounced.
- Composition: Broadly, estimates for consumption were unchanged while a positive revision to Government Spending offset negative revisions to Investment and Net Exports.
- Timing: Growth in 2017 was revised significantly higher while growth in 2018 was revised meaningfully lower. Indeed, headline growth in 4Q18 was cut in half from 2.2% to +1.1% Q/Q SAAR – a Quad 4 in Q4 reality that was clearly playing out in market prices and the preponderance of high frequency macro, if not the official reported GDP data at the time.
- Income/Profits/Savings: Notably, Corporate Profits were revised significantly lower (particularly for 4Q) while the Personal Savings Rate was revised materially higher on the back of larger interest and dividend payments. The Personal Savings Rate for 2018 was revised a full +100bps to 7.7% from the previous estimate of +6.7%. The revisions to National Income and Corporate Profits are visualized below.
Revisions Create Revisions: US GIP Model Refresh
The advent of these advanced and revised figures confirmed our #Quad3 nowcast for 2Q19E. That’s the easy part. As always, the more difficult task lies in the charting of the most probable path forward, which itself is also subject to the BEA’s revision cycle. Fortunately, we’ve got you covered:
- GDP Stabilization: The meaningful revisions to the 2017-18 GDP cycle – including a now-deep plunge into #Quad4 in Q4 – created a dramatic flattening out of the NTM slope of the 2yr comparative base effects curve. Recall that the prior slope was up-and-to-the-right through at least 1Q20E. The net result of the aforementioned flattening means that the most probable path forward for the YoY rate of change of Real GDP growth is similarly sideways. We are divergent from economist consensus with respect to that view, as the Street is calling for a persistent deceleration in domestic economic growth over the NTM. The delta lies in the difference in modeling approaches – theirs (deterministic); ours (stochastic). All told, we are more or less in line with consensus for 2H19E, but investors should brace for a slight upward revision cycle in growth expectations throughout 1H20E to the extent economist consensus has to come our way on growth then.
- GIP Destabilization: Ironically (or not-so-ironically if you’re a data sycophant like myself), the likely stabilization of US Real GDP growth beyond the current quarter means the dots on our US GIP Model are hugging the line throughout and the associated accelerations/decelerations will undoubtedly create consternation surrounding each subsequent Quad outcome in real-time. It’s the time series equivalent of going from smooth sailing in rate of change terms to experiencing minor turbulence. Fortunately, we’ll have our nowcast model guiding us throughout and when you analyze the probable path forward for several of the key high-frequency indicators that are featured in that framework, the bottom up data are likely to confirm what the top-down comparative base effects imply – i.e. #Quad4 in 3Q19E and #Quad2 in 4Q19E. Our #Quad3 forecast for 1Q20E remains intact and today’s advance 2Q19 data gives us visibility on #Quad1 in 2Q20E from a comparative base effects perspective. We’re highly skeptical of that #Quad3 forecast because when you look at the probable path forward for the top-10 drivers of our dynamically re-weighting, 30-factor predictive tracking algorithm for US Real GDP growth pretty much everything is likely to bottom out in the fall of 2019 and trend higher from there through the middle of next year. As such, fixed income investors would do well to brace for Mr. Market starting to price in what could materialize as two consecutive quarters of #Quad2 at some point over the next couple of months. Recall that #Quad2 is the most hawkish environment for interest rates. 2020 rate cut expectations will have to be revised lower (i.e. less monetary easing) to the extent that outlook proves prescient.
- No Rest for the Weary: If you thought figuring out the market throughout 2019 was hard, the sequence of 4-2-3-1 will be even more difficult for investors to risk manage given that each subsequent Quad in the sequence is the polar opposite of the prior regime. This means that instead of making wholesale shifts in asset allocation/portfolio construction terms, investors would do well to stick with/overweight assets that work well in the then-current and pending Quadrant and out of/underweight those that tend to do poorly. There’s a lot of PnL to be lost getting too cute making wholesale changes in an untimely fashion.