Resilient Economy

It wasn't that long ago that some economists and investors were seriously concerned about US growth going negative for the first quarter. Now, based on our calculations, which we discuss below, it looks like real GDP grew at a respectable 2.6% annual rate in Q1, meaning that US real output was 3.1% larger than Q1-2018.

What makes this even more impressive is that, in spite of attempts by the government to fix seasonal adjustment issues, the first quarter has been weaker than other quarters, averaging only 1.7% growth between 2010 and 2018 versus 2.5% growth for the other three quarters. Time will tell, but we think growth will be higher, on average, for the remainder of 2019 as well.

Remember all those obsessing about the "second derivate" of GDP? That is just a fancy way of saying whether the growth rate is getting faster or slower. The economy grew at a 2.2% annual rate in Q4, which was slower than the 3.4% pace in Q3, which, in turn, was lower than the 4.2% pace in Q2. The theory was that the trend would continue until we were back in recession.

But now it looks like real GDP re-accelerated in Q1. The "second derivate" argument doesn't work unless fundamentals have changed enough to push the economy into recession. Clearly, this hasn't happened.

Monetary policy is not tight, companies are still adapting to lower marginal tax rates, and the odds of a full-blown trade war are diminishing. In addition, deregulation is having a positive effect on the willingness to invest in businesses. The only major problem is an unwillingness to tackle the long-term spending path the federal government is following, but we don't see that taking down the economy in the near or medium term. We still have time to address spending before it seriously threatens growth.

Here's how we get to our 2.6% real growth forecast: