Stock Market Crash: GDP Report Didn’t Help

    Stocks crashed today, with the SP down 1.73%. Yet the government released the GDP report this morning showing a 3.5% growth. However, buried in the details is the fact the increase was due to one-time figures such as inventory building, rushing to buy before tariffs are implemented, government spending and savings drawdown. If these factors were removed the GDP would have been negative 0.1%. Capital expenditures, vital to fixing the economy and achieving a proper labor market recovery, had been ranging from 10% to 4% in the past three previous quarters but this recent quarter ending 9-30-2018 had only a 0.4% annualized growth. The implication is that the economy has failed to break out of its long term trend of a 2.5% GDP. Traditionally a GDP below 2.0% is at the stall speed where the economy stalls out and crashes. With the two year Treasury Note interest rates 260 bps higher than the trough it seems the economy will be slowing down soon, since most Fed rate hiking cycles usually have a 3% rate increase.
Consumer spending, if not for their drawdown of savings, would have only been 2.5%.

  The core PCE inflation measure showed an annualized 1.6% rate for the recent quarter. This is very low for an economy that just received a huge federal tax cut deficit stimulus and which has a very low unemployment rate of 3.7%. Something must be wrong with the data since at the end of a long business cycle with full employment, usually inflation and GDP growth are each around 4%. The core PCE inflation rate last quarter was 1.6% which is very low considering the top of along cycle often has a much higher inflation rate. My own estimate of inflation is that “Owner’s Equivalent Rent” cost of housing warps inflation gauges, inflating PCE by 0.25% (and CPI by 0.5%) so the real PCE is 1.35%.
What is wrong is that the unemployment rate counts people with underemployment as if they had a real, decent job, and thus the economy (as shown in adjusted GDP figures) is quite weak and with the coming stock market crash will tip into recession.

   AEI had an article by Jim Pethokoukis showing the economy is fading, not accelerating. I have written before that the tax cut is not a real cut for individuals using a seven year inflation-adjusted average, and for large corporations, that made full use of loopholes that were available before the new law was passed, it is not a true tax cut.
Trade wars act to disrupt and slow down businesses and slow down consumption, which can lead to recession.

   Investors need independent financial advice about the GDP report and the stock market.

2018-10-26T14:19:10+00:00October 26th, 2018|mayflowercapital blog|Comments Off on Stock Market Crash: GDP Report Didn’t Help

About the Author:

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Donald Martin has a B.A. in Accounting and M.B.A. Finance, and has passed the rigorous CFP® exam and met the experience requirements needed to become a CERTIFIED FINANCIAL PLANNER™ professional. He has been employed in the financial services industries for 30 years and has been investing for his own account for 38 years. Donald Martin’s 19 year career in lending prepared him for fixed income analysis, Securities analysis, and macro-economic analysis used for investing. Donald Martin founded Mayflower Capital in 1993 to provide independent financial advice and implementation of advice about loans. In 2005 Donald Martin changed the company’s mission to providing independent financial advice about investments and financial planning and stopped providing loan services. Donald Martin has a B.A. in Accounting and M.B.A. Finance, and has passed the rigorous CFP® exam and met the experience requirements needed to become a CERTIFIED FINANCIAL PLANNER™ professional. He has been employed in the financial services industries for 30 years and has been investing for his own account for 38 years.