US GDP Growth Is as Good as It Can Get

US GDP is tracking a near-unprecedented 5.6% growth this quarter, per the Atlanta Fed NOWCast. This likely overestimates growth more than usual but would be the highest rate since 1984 (see chart) if realized, outside of the pandemic. It’s a very long way from the feared recession, and remarkable given the big rate hikes the past 18 months.

It’s also peak growth, with lead indicators softening as rate hikes catch up. The economy has been firing on three of four cylinders. Consumption, investment, and government spending growth have offset weaker trade but are all set to ease. A soft landing is the base case, and the slower growth rate should take the sting out of bond yields and favour long-duration assets like tech vs. cyclicals and Value.

Consumption is near 70% of GDP and set to ease with the labor market gradually weakening, pandemic savings near exhausted, and student loan repayments restarting. Though buffered by now rising real wages, de-levered household balance sheets, and a stock market wealth effect. Rising gasoline prices are a wild card consumer tax, and we see plenty of signs of underlying consumer caution. Investment is seeing crosscurrents of real estate pressures but strong tech/AI growth and tailwind from Bidenomics ‘made in America’ policies. This has helped push government spending growth but will slow a little with the likely 2024 budget compromise.

The Atlanta Fed GDPNow is designed to as close as-close-as-possible mimic the US real GDP growth calculation, but publicly and in a timelier manner than the lagging official report. It tends to become more accurate as the quarter progresses and more data is incorporated. But it does tend to overestimate reported GDP growth by an average of 0.75% (since 2011) and is one of the better of the many such ‘real-time’ growth trackers out there. The official GDP report has an advance reading a month after the quarter's end and then two subsequent data revisions.