Third Quarter Real GDP - 3.8%!

While the Sunday morning talk shows discuss the number of Civil War monuments that can dance on the head of a pin...and a rare Eclipse grabs focus...investors might be shocked at how the economy has accelerated.

Although we still have more than a month left in the third quarter, and many more pieces of data to come, as of August 16th the Atlanta Fed's "GDP Now" model, which tracks and estimates real GDP growth, says the economy is expanding at a 3.8% annual rate in Q3. If correct, that would be the fastest pace for any quarter since 2014.

We usually take forecasts this early with a grain of salt. After all, a lot can happen over the remainder of the quarter. And, on some prior occasions, the Atlanta Fed has projected rapid growth for a quarter mid-way through, only to ratchet back the forecast by quarter-end to a more pedestrian Plow Horse growth rate near 2%. But, in this particular case, we think the pick-up is real. In fact, our own internal forecast suggests the exact same growth rate of 3.8%.

One thing more pessimistic analysts are focusing on is that "inventories" are adding about 1% to the third quarter growth rate. It looks like businesses are stocking shelves at a more normal pace after the lull in the first half of the year. Excluding this inventory boost, First Trust models have real GDP growing at a 2.4% annual rate in Q3, while the Atlanta Fed model has it at 2.8%.

It's hard to remember that the original report for Q1 real GDP was less than 1% growth. That report worried many investors, and doom and gloom stories abounded. But the foundation for continued economic growth remains in place.

It's true that the US is unlikely to see tax cuts or real tax reform (or both!) anytime this year. And this will make sustaining GDP growth at a 3.8% rate very difficult. But we expect favorable changes in tax policy by early next year. All that said, the best news is any threat of growth-harming tax hikes remains virtually nil.