GDP for Q1 was revised upward to 1.4% on an increase in consumer spending. The US economy enters its ninth year of economic growth in July.
The first GDP estimate for Q1 was originally reported at 0.7%. So Q1 GDP grew at twice the rate as originally thought. That’s great. Obviously 1.4% growth is not great but to have GDP growth at twice the rate than originally thought is awesome.
The idea that the Federal Reserve has hiked rates too far, too fast, and thus was crashing GDP is pushed a little ways off with this Q1 GDP upward revision. Clearly economic growth is not slowing as rapidly as everyone originally thought.
Some economists suspect the Q1 GDP number still underestimates the true rate of increase in the US. Regardless of the upward revision to GDP, President Trump’s stated goal of quickly boosting annual GDP to 3% remains a struggle.
Analysts estimate that the U.S. market will grow at a 3% rate in the April-to-June interval, although the downturn in equipment orders and shipments reported earlier this week increases the danger that industry investment will supply less of a boost than expected.
A sustained average economic growth rate of 3% hasn’t been achieved in the US since the 1990s. The U.S. economy has grown an average of 2% since 2000.
Initial indications that GDP has accelerated in the next quarter are unlikely in the face of recent data on retail sales and manufacturing production.
The pitch by the Federal Reserve is that GDP is growing which is why they are hiking rates. The Fed has said that rate hikes are representative of their belief that economic growth is picking up and so really, rate hikes are something that is bullish for the economy and GDP going forward.
If you believe that, I know a guy who has an original picture of Jesus Christ in a piece of brick that he’d like to sell you for just $9,999.99.
The mainstream financial media is running with Yellen’s story as if it’s based in reality.
You can’t afford to be so gullible if you have your scarce dollars invested in the stock market.
Here’s a reality check chart that shows, everytime, that rising rates are more indicative of a falling GDP than of a rising GDP.
President Trump just said that GDP numbers are going to be shockingly good! Did the President just leak the GDP number two weeks early? But more importantly, does he know something we don’t?
GDP Numbers Are Shocking Bad
The gross domestic product is on a bad trajectory.
The economy and hence GDP has been contracting. Even the credit impulse which leads the gross domestic product by about 3 months, has plunged lower. But here is President Trump today:
What is going on? Is the President privy to information on the gross domestic product weeks before everyone else? The President didn’t just say the number would be good, he used the words “shockingly good”.
The Dodd Frank Wall Street Reform and Consumer Protection Act took a hit this week after the House passes a bill that guts many parts.
The House passed a bill called the Financial Choice Act that would allow banks to opt out of some regulations if they hold enough capital and would repeal the Volcker rule that barred banks from speculative trading.
One key component of the bill that I like is that banks will no longer be bailed out with tax payers funds as they will be forced to go through bankruptcy like any other industry.
Repeal the Dodd Frank Wall Street Reform and Consumer Protection Act
President Trump promised to repeal the Dodd Frank Wall Street Reform and Consumer Protection Act because it’s bad for business and in particular for small banks.
One of the original authors of the legislation, Jeb Hensarling (Republican from Texas) said Dodd Frank is a major factor in limiting GDP growth in the wake of the financial crisis.
Banking stocks are surging higher on news of the House bill but most see little chance of it passing in the Senate. Still, stock traders figure that even a watered down Senate version is better than what we currently have.
As traders, we track the monthly Employment Situation report closely. The market often does a short-term move on the first Friday of every month when the Employment Situation report for the previous month is released. Do you understand what the Employment report is showing? I bet many traders do not. As traders, we have to know a bit of macroeconomics, so we don’t make the wrong decisions with our money. Let’s briefly look at what the Employment Situation report shows.
There are different types of unemployment. When we talk about unemployment, most traders default to what is called cyclical or demand deficient unemployment.
Cyclical unemployment exists when individuals lose their jobs as a result of a downturn in aggregate demand (AD). If the decline in aggregate demand is persistent, and the unemployment long-term, it is called either demand deficient, general, or Keynesian unemployment. Demand deficient unemployment is caused by a lack of aggregate demand, with insufficient demand to generate full employment. Demand deficient unemployment shifts the AD curve left (inward) from AD to AD1.
GDP contracts from Y to Y1 and wages fall from P to P1. If wages “stick” at P rather than fall to the new equilibrium wage of P1 following a shift of demand, the result will be a much greater unemployment equal to Y – Y2.
Frictional unemployment is not caused by a reduction in aggregate demand. Frictional unemployment is due to people being in the process of moving from one job to another. The time, energy and monetary cost of searching for a new job is called friction. Friction is an unavoidable aspect of the job search process. Friction is a natural part of seeking new employment, but friction is typically short-term.
When most traders get the monthly Employment Situation report data of something like 150K jobs created in October, they don’t realize that those are net changes. What actually happened is that there are around 5 million new hires during the month, and 4.85 million new separations (quits or layoffs). The number you hear about each month is the net number or the difference between new hires and new separations. The net number is misleading. The net number hides the vast amount of job change which is happening.
Every month millions of people quit their jobs to get a new job. Some go back to school for more training and some retire. Other people start new jobs after graduating or finding new opportunities. This all leads to frictional unemployment and it’s a healthy part of a dynamic economy.
The prospect of a Federal Reserve rate hike is driving up the US dollar. The rising US dollar has a significant impact on the US economy and thus stock market. It’s important that traders understand the implications of a rising US dollar from a macroeconomic perspective. Continue reading “Macroeconomics of Rising Interest Rates”
Do you remember when the WSJ, CNN, CNBC, NBC, ABC, CBS, Bloomberg, Forbes, and Reuters ran stories at the start of the year about how no one even knows who was advising Trump on economic matters? They even went as far to say that Trump had no support of any economists. Continue reading “Guess Who Is On Trump’s Economic Team, SWEET!”
Most government revenue comes from the taxation of transactions and labor. Taxes impact both the supply and demand curves. Taxes cause a buyer to pay more for something and suppliers to receive less. The loss of value for both buyers and sellers is called the deadweight loss of taxation. Taxation has an enormous impact on the economy and thus stock market. Traders and investors need to understand the effects that taxation has on the economy and thus stock market. We will examine deadweight loss from a microeconomics perspective, ending with a macroeconomics viewpoint.