"Trump Bump" Results Are In

What Now?

The U.S. Bureau of Economic Analysis released the advanced estimate of Q2 GDP yesterday showing an annualized increase of 4.1% (circled in yellow on the above chart). Slightly below expectations of 4.2%. The 1 year moving average (the pink line) of previous quarterly GDP, which smooths out the volatility of the quarter to quarter data, rose slightly to 2.8%.

A scan of the data shows that the consumer played a big part in this increase, despite seeing less income growth and hence a reduction in the savings rate over the quarter. Likely a spill-over of the effects of the lower corporate tax rates that came about with President Trump's tax reforms ("Trump bump").

We don't expect the consumer to be able to sustain this kind of momentum. Higher interest rates on top of record debt and lower income growth will hobble future consumer spending.

Also a surge in exports of goods, likely in advance of anticipated protectionist tariffs was a big factor in Q2 GDP growth. This will be a one-time thing.

Look for this to detract from Q3 and Q4 growth: Higher interest rates and the stronger $US will also start to play into exports as we move forward.

As far as our theme that we are drawing close to the end of the cycle (red arrows in the above chart and see my previous series of blogs), this plays into it perfectly: the proverbial "last gasp".

Q2, which ended on June 30th, is well be hind us (ancient history in our world of forward thinking) and we now have to get a sense of what comes next and that is a continuation of late cycle theory: higher interest rates (monetary policy tightening), a flatter yield curve (heading towards inversion), slower economic growth, reduced earnings growth, lower stock markets.

Friday's stock markets might have finally begun looking toward the future (S&P 500 lower by .66%, NASDAQ lower by 1.4%). Bond markets have have been doing so for quite some time.

Are you prepared?
We (and our clients) are.