Little Reaction to GDP Data? Look Beyond Today’s Report

Today’s release of the latest Preliminary U.S. Gross Domestic Product report for the third quarter showed a number better than the estimate, but the news garnered barely a whimper from the markets because the data is stale. It seems there is always a build-up in the news for this GDP report, but almost no reaction in the markets.

Data takers probably had a July 31 cut-off or the end of the first month of the third quarter to start piecing together their harvested data. In the meantime, life went on in the U.S. economy so with today’s report, we are probably looking at numbers that could be nearly 30 days old. This is why the GDP report isn’t carrying much weight today.

However, there are times when the report could take out more significance. The Final GDP report of any quarter, while still stale data, usually takes on a little more importance. Also as the number approaches the benchmark 5 percent level, I think investors will start paying closer attention to this figure.

The U.S. GDP has been stuck inside a 2 to 4 percent range for so long that investors have grown accustomed to seeing ho-hum numbers, but hitting 5 percent will be a significant event.

The same is true when GDP turns negative, but for other reasons. When this occurs, investors watch the numbers closely for consecutive quarterly negative reads to determine whether the economy is in a recession.

Trump, the Fed and GDP

On December 6, 2017 at a Cabinet meeting, President Trump told reporters he’s holding out for the prospect of U.S. Gross Domestic Product more than doubling to a 6-percent annual growth rate. That figure would be more than twice the 30-year average pace of 2.5 percent, and more than triple the Congressional Budget Office forecast for the next decade. The last time the U.S. economy hit a 6 percent annual growth rate was in 1984, but only briefly.

“So we’re at 3.3 percent GDP. I see no reason why we don’t go to 4 percent, 5 percent, and even 6 percent.” – Donald Trump, President.

Since the beginning of the year, the U.S. Federal Reserve has upped its forecast for GDP, citing tax reform as one of the reason for the increase. However, it also said that GDP would moderate in 2019 and beyond.

On August 1, the Atlanta Federal Reserve District said economic growth is expected to continue at a rapid rate in the third quarter. The central bank district estimates that GDP will increase 5 percent for the July-to-September period.

Just five days ago, speaking at the Jackson Hole, Wyoming, central bankers’ symposium, Cleveland Federal Reserve President Loretta Meister raised her outlook for the economy and gross domestic product for 2018, adding that the central bank’s plan for gradual interest rate increases is appropriate.

“I’ve been upping my forecast. I’m now at 2.75 percent to 3 percent for the year, probably closer to 3 percent,” Meister told CNBC. “I think that the fiscal policy – the stimulus and the tax cuts – has been a positive for the economy in terms of demand growth, and so that’s one of the factors.”

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Well, Fed Chair Powell?

If GDP continues to rise at its robust pace, Fed Chair Powell is going to have to decide to maintain the Fed’s current gradual rate hike policy, or step on the gas and hike rates more aggressively. Based on this assessment, the markets may have interpreted his speech on Friday all wrong. More on that tomorrow.