GDP: Did the Fed get it wrong?
Macro Perspectives
5 Points
S&P 500 was slightly up on Thursday, the Nasdaq was around flatline while Dow Jones added 100 points as investors digested another batch of earnings and economic data.
The US economy expanded 3.3% in Q4, surpassing forecasts of 2%.
Initial claims rose well above forecasts, reaching 214K, and durable goods orders unexpectedly flattened.
On the corporate front, Tesla sank over 12% dragging the Nasdaq lower, after lower-than-expected earnings and revenue, along with a warning about reduced volume growth prospects for the year.
Conversely, IBM saw a 9% surge after reporting a revenue rise attributed to AI.
Macro Perspectives
The report on GDP showed the economy grew at a 3.3% annual rate in Q4.
As you can see in the chart below, the Atlanta Fed undershot in its estimate (the green line) and the economist community missed by almost two percentage points (the blue line).
If we look back at Q3, the economists were looking for a little better than 2% growth - it came in at 4.9%. The worst offender was the Fed - coming into 2023, they were looking for just 0.5% growth. For the full year, it was closer to 3%. Meanwhile, throughout that period, the media messaging was all about "looming recession."
They got it wrong.
But maybe 3% is recession-like, when we should be getting far higher growth.
Clearly the Fed has done everything they can to induce a recession. They took real rates (inflation-adjusted rate) to historically high levels, and if we thought the levels were dangerously high, they told us they would stay there, "higher for longer."
Indeed, higher rates have clearly impacted affordability and the Fed's threats have clearly impacted psychology. You can see the former in the housing turnover. You can see the latter in the sentiment and inflation expectations surveys.
So, after all of Fed's imposed downward pressure on the economy, how did we get the type of economic growth mostly seen over the past thirteen years when accompanied by zero interest rates and QE? As we discussed here in my daily notes, it's because of this ...
The massive monetary and fiscal response to the pandemic (plus the subsequent agenda spending binge) ramped the money supply by 40% in just two year's - that was almost ten years worth of money supply growth (on an absolute basis), dumped onto the economy over just two years.
The level of money supply is still very elevated. If we extrapolate out the pre-pandemic trend growth in money supply, the economy still has more than $3 trillion in excess money sloshing around.
With all of this in mind, with the Fed doing its best to strangle the economy, we still had 6% nominal growth last year. Clearly it could have been much stronger.
If the Fed would accept a higher inflation rate for a period of time, and encourage companies to raise wages to align with hot productivity levels, the economy would boom (likely double-digit growth) - that's precisely what's needed to reduce the debt burden (i.e. it would increase the denominator in the debt/gdp measure).Â