SHI 4.11.18 Back to Basics

SHI 4.4.18 Brevity is the Soul of Wit
April 4, 2018
SHI 4.18.18: This is Not Your Grandfathers …
April 18, 2018

The next GDP release is April 27th.   What will it say?   

 

I’m not overly optimistic.  I think Q1 GDP growth will be fairly tepid — probably in the 1.6-1.8% range.  Why?

  • Consumer spending growth has been, well, close to zero.  As this component represents about 70% of our GDP, the other components have a lot of ground to make up.    
  • Net exports probably won’t help.  They are likely to be negative, since our trade deficit keeps on growing.
  • Investment and government spending should be a net positive.

Read on for more details.

 

Welcome to this week’s Steak House Index update.

 

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/


Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.   This has been the case for decades … and will continue to be true for years to come.

Is the US economy expanding or contracting?

According to the IMF (the ‘International Monetary Fund’), the world’s annual GDP is almost $80 trillion today.

During the calendar year 2017, US nominal GDP increased by $833 billion … by an amount approximately equal to the market capitalization of Apple.  At the end of 2017, US ‘current dollar’ GDP was almost $20 trillion — about 25% of  the global total.    Other than China — a distant second at around $11 trillion — no other country is close.

The objective of the SHI10 and this blog is simple: To predict US GDP movement ahead of official economic releases — an important objective since BEA (the ‘Bureau of Economic Analysis’) gross domestic product data is outdated the day it’s released.

Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric.

The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.


Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore related items of economic importance.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.


The BLOG:

At its essence, the SHI10 is designed keep a finger on the pulse of our extremely large and complex economy.   I’m hoping the light-hearted SHI10 methodology can help us forecast the next and future GDP growth readings.

The reading for Q1 2018 will be released on April 27th.   What will it be?   Will it match or exceed the 2017 Q4 reading of 2.9%?

If you ask the Atlanta FED, the answer is no.  Their April 10th “GDPNow” forecast is down to only 2.0%.   This number is a far cry from their January forecasts of a Q1 GDP growth reading between 4 and 5%.  Their projection has been driven lower by:

  • The employment report from the U.S. Bureau of Labor Statistics on April 6 showing first-quarter real consumer spending growth fell from 1.3 percent to 1.1 percent;
  • First-quarter real private fixed investment growth fell from 5.3 percent to 4.5 percent; and,
  • The latest disappointing monthly employment report.

The NY FED disagrees.   Their latest April 6th forecast is a robust 2.90% — identical to the Q4, 2017 number.

You’ll recall we can deconstruct the GDP growth figure into four components.  Our economy’s performance is a sum of consumer spending — about 70% of all economic activity — plus investment, government spending and net exports.

Consumer spending has three components:  Durable goods, non-durable goods, and services.    You may recall that a durable good is one with a useful life of 3 years or more.  Clearly, a beautifully grilled T-bone is not durable.  It won’t even last thru dinner!  🙂

But autos are durable.  And the annualized sales rate has dipped from an all-time high of 18.9 million units in September of last year to only 17.4 million units as of the February, 2018 reading.   But don’t be fooled:  This number is still considerably better than prior readings in the past few years.

I suspect auto sales may be dragging down the durable goods numbers in the recent PCE analysis.  They look pretty weak for the first 2 months of the year.  Measured in billions of dollars, here are the numbers for each group, by month, showing the sum total for each:

December: 2017 January: 2018 February: 2018
Durable Goods 4,343 4,307 4,308
Non-Durable Goods 2,619 2,608 2,601
Services 7,758 7,763 7,763

As you can see, all the spending numbers have barely moved since December.  Durable and non-durable goods sales are down, slightly.    Services are up, slightly.   So while the level of consumer spending is clearly stable — which is a good thing — spending is definitely not increasing.

The other components — investment, government spending and net exports — contribute about 30% to GDP.   Given recent dollar index weakness, I thought we’d see net exports increase this quarter.  Typically, if a country’s goods are cheaper in the currency of the buyer nation, sales (exports) increase.  But that is not yet happening.

No, the opposite is.  The US trade deficit is growing … suggesting net exports will be a drag on GDP.   Investment might be a net positive … and government spending is certainly growing.  So these two segments may make a small positive contribution.

But, all in all, the numbers are telling me to expect a tepid Q1 GDP reading.   What are the steakhouses telling us?  Let’s take a look:

Once again, expensive cuts of beef remain popular.   Seattle is the clear leader, once again reflecting an almost fully booked reservation landscape.  Spring is in the air in New York, as our 4 restaurants are out of the red for only the second time this year.   Only in the OC and Dallas is demand down for our pricey eateries.   But, all in all, with a SHI10 reading of <26> this week, consumers are clearly still splurging on their steaks.   Here’s the longer term trend:

Our SHI10 continues to suggest consumers are spending.   In fact, the consistency of our SHI10 reading seems to be in complete alignment with the consumer spending discussion above.   The numbers do not reflect robust activity — more of a consistent behavior, a consistent demand.  Which means the SHI10 is predicting a low- to mid-range GDP growth figure later this month.

Before we go, permit me a brief comment on inflation.  It’s worth noting the most recent readings for the ‘Producer Price Index” (PPI) and the ‘ Consumer Price Index’ (CPI) were released this week.   The PPI increased by 0.3% over the prior month.  The CPI declined 0.1% in March.   These data follow on the latest Feburary PCE index which reflected a 0.2% increase over the prior month, and 1.8% over the prior year.

Like many economists and investors, I remain concerned about the resurgence of higher inflation.  I am constantly looking for signs that the US tax cuts, overseas capital repatriation, increased federal government spending, shrinking dollar index value, and the US and global expansion have, in some combination, stoked wage and general inflation.   I’m not yet seeing any consistent indicators.  Nor do consumer expectations for future inflation seem to have modified.   We’ll keep watching.

  • Terry Liebman

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