Thoughts on Q1 2024 GDP Report
Not as bad as it people say
***As always, this is not investment advice. Everyone who reads this agrees to take personal ownership of all his/her investing decisions.***
We got the first print of the Q1 2024 US GDP estimate.
Nominal GDP came in at yearly growth pace of 4.8%. Real GDP was pulled down by strong price inflation, to 1.5%. Markets don’t like the inflation, and indeed it’s not encouraging to see the economy fail to map solid nominal growth into real growth, but it’s only one quarter, and inflation is noisy and backward-looking.
I don’t worry too much about the GDP deflator inflation signal, we already knew inflation was high, and I already expected the Fed to tighten this summer—through forward guidance, rather than a rate increase.
Interesting fact: the best predictor of next quarter’s NGDP growth isn’t market signals, it’s last quarter’s NGDP growth.
The take-away from this report is that nominal GDP grew at 4.8%. In my opinion, the optimal long term NGDP growth rate is about 4.5%, so this aspect of the report is positive. I’d have been more concerned if NGDP came in at 6% annualized, and real growth had been 2.5%.
Assume the Fed wants PCE inflation around 2% - 2.2% and the economy can sustain about 2%-2.5% real growth. Going much above 5% on NGDP thus ensures excessive near-term inflation. Today’s report suggests the Fed hasn’t fueled that fire in Q1.
Expect inflation reports to come in hot through the summer, for the Fed to focus on that, and not forward-looking indicators of inflation (5-year TIPS breakevens, nominal GDP growth). Stock prices will fall, nominal GDP growth will slow, bonds will rise. The Fed will end up cutting rates to stave off recession as the sinking economy pulls down the equilibrium short rate. TLT is your friend.
When the 5-year TIPS Breakeven hits 2.1%, I’ll start creeping back into recklessly volatile shares, and easing out of bond ETFs. I’ll run this policy slow and steady until the 5-year BE is back to ~2.5% and the cycle repeats.