Authored by Lance Roberts via RealInvestmentAdvice.com,
Last week, while I was on vacation, I penned a report prior to the release of the second quarter GDP report in which I noted the following:
“Tomorrow, the US Department of Commerce will report its advance estimate of 2Q GDP which will be the long-awaited evidence that “Trumponomics” is working. The current estimates for the initial print run the gamut from 3.9% to over 5% annualized growth. Regardless of the actual number, the White House spokesman will be quick to take credit for success in turning America’s economy around.
But is that really the case? First, there are several things to remember about the initial print on economic growth.
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The initial estimate is based on the collection of estimates from Wall Street economists. With no real data in just yet, the initial estimate just a “guess.”
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The number is annualized. So, a growth of 1% in the economy is reported as 4%. However, as we know from the first quarter, quarterly growth can vary widely in a given year.
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Lastly, a one-quarter surge in economic growth doesn’t make much difference in the long-term trajectory of economic growth, or in this case, ongoing weakness. The chart below shows the change in economic growth by decade.”
As noted, the 1% growth rate in the second quarter was multiplied by 4-quarters to reach the proclaimed 4.1% growth rate. However, there is little evidence to support the notion that such mathematical projections have much validity. The chart below shows inflation-adjusted GDP growth on a quarterly basis as compared to economist expectations of sustained growth over the next 3-quarters. Not surprisingly, economic growth tends to vary widely from those expectations. More importantly, spikes in economic growth tend to lead lower rates over subsequent quarters.
As we now know, the actual first estimate aligned with the 4% assumption made last week along with the expectation the current Administration, and media pundits, would go “all giddy.”
However, from a portfolio management standpoint, I am more interested in the “devil in the details” as economic growth is key to sustained growth in corporate revenue and profits. From an investment standpoint, it is more important to understand the sustainability of economic growth when projecting forward returns and modeling asset allocations around those assumptions. There are also several other important considerations with respect to the most recent GDP report.
Economy Gets A $1 Trillion Boost
With the release of the Q2 GDP report, and not covered by any of the mainstream media, was an adjustment the economic data going all the way back to 1929.
As noted by Wolf Richter:
“What the Bureau of Economic Analysis released Friday as part of its GDP report was a huge pile of revisions and adjustments going back years....