FUNDAMENTAL ANALYSIS
the impression that the economy is unbalanced in some way. The debate on whether GDP is measured correctly seems to be warming up, and indeed whether GDP is the best overall measurement for the health of an economy, but let’s leave that to one side.
On the plus side of the ledger, emp loy me n t data is strong, business
and
c on s u me r confidence is very high and the economy is operating above potential and has pretty much eliminated the slack created during the last crisis. Along with the recent tax cuts and i n c r ea s e d G ov e r n me n t spending, surely the economy is about to accelerate?
And if the consumer is the juggernaut of the economy, corporate profits are the engine. Historically, changes in profits leads the capex cycle which leads the economy. However, the argument is growing that financial engineering
(share buybacks, sometimes with borrowed money,
So what of GDP itself? Last Summer,
the
US was hit by two destructive storms, and the rebuilding along with replacing d a m a g e d vehicles
should
If the GDP is in anyway questionable, it only increases the chances of policymakers making policy errors
On the negative side of the ledger, we have record debt, a near record low household savings rate and now retail sales flat over the last few months. The consumer is supposed to be the juggernaut of the US economy, and without much larger wage growth, it will not be possible for growth to accelerate unless consumers continue to pile on debt, which seems unlikely.
along with M&A) is distorting the picture and hurting the economy. A little bit like throwing some sand in the engine to extend the metaphor.
Before we get onto looking at some charts, the reason for trying to understand the moving parts of the economy as well as the whole is very important. Whether or not you believe that GDP is both the best measure for the overall health
have actually boosted GDP in the second half of last year. Chart 1 shows both quarter on quarter (in green) and year on year (in red) growth in US GDP. The pick- up in quarterly
growth rates in Q3 and Q4 are extremely modest given the weather/ rebuilding argument.
Our main concern is that the consumer is tapped out. Chart 2 shows outstanding consumer credit per cent of GDP, and it just keeps rising. As interest rates keep rising, those with debt are going to have to allocate more to debt service payments, perhaps at the expense
FX TRADER MAGAZINE April - June 2018 25
FX
of the economy and that it is being measured correctly, this is the data that we as investors and the Fed as policymakers have
making decisions. Furthermore,
to hand in if
the data is in anyway questionable, surely it only increases the chances of policymakers making policy errors.
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