Three Data Items today:
#1: As much as we love high-frequency economic data models, some of them should come with a health warning. We’re thinking especially of the Atlanta Fed GDPNow model, which is currently “predicting” 9.5 percent GDP growth for Q1 2021.
Here’s the thing though: this model is only designed to be accurate AT THE END of a quarter, not in the middle as we are today. The Atlanta Fed says as much in its in-depth description. We met Dave Altig, the Director of Research at the Atlanta Fed, a few years ago and asked him if he was surprised GDPNow was getting so popular. His response was “yes”, followed by “I just hope people use it correctly”. So much for that.
The reason the GDPNow model has gotten so bullish is a series of recent economic releases – specifically PPI, Housing Starts and Import/Export Prices – that moved the model but are skewed by a variety of pandemic-related comparison effects. It’s not the model’s fault – it was tuned for normal times. But we think human economists’ 3 percent GDP growth estimate for Q1 2021 is far more realistic. We would also counsel caution on using GDPNow for the next few quarters; the wonky comp problem is only going to get worse, especially in Q2.
Now, if you want a more reasonable Fed-generated high frequency GDP model we like the New York Fed’s Weekly Economic Index. As the chart below shows, US economic output has not really accelerated since November. Q4 2020’s GDP growth was 6.0 percent on an annualized basis, so we’re likely running a touch below that right now.
Takeaway: US economic growth is not 10 percent. But 3-5 percent is good enough to generate corporate earnings leverage and that is what supports stock prices.
#2: Real long term US interest rates continue to be extremely low, which is a nice way of saying they’re still profoundly negative. They currently sit at -0.92 percent. That’s a bit better than the -1.08 percent where they started 2021, but they haven’t been positive for over a year now. As we noted earlier in the week, inflation breakevens imbedded in these bonds have broken out but actual 10-year yields have not moved as much. Hence, negative real rates.
Here’s an 18-year chart of real US Treasury rates (all the data available), which shows the only prior period of negative real rates (December 2011 – June 2013) lasted 19 months. You’ll also see that the current period of negative rates is actually more pronounced than the prior instance. The lowest real yield back then was -0.84 percent. Worth noting: the 2011 – 2013 period of negative real rates doesn’t actually line up all that well with Federal Reserve QE bond buying, which only began in earnest in early 2013 and concluded in Q4 2014.
Takeaway: market wisdom has it that negative real rates are good for stock prices, mostly because the S&P 500 was up 16 percent in 2012 and 32 percent in 2013, but also because it feeds the “there is no alternative” (TINA) narrative that only stocks can produce positive real returns in such an environment. We think the clock is ticking on negative real rates because nominal rates are finally starting to move higher. While that’s ultimately a sign that economic growth is on the way, equities may not immediately welcome the change. We’re seeing some of that right now.
#3: Texas has been hard hit by winter weather, and we’re sending our best wishes to any readers there, but we also wondered what the current problems may mean for a US economic recovery. After all:
- Texas is the second largest contributor to US GDP (8.4 percent of the total), behind only California (14.7 percent) and ahead of New York (8.1 percent).
- It is responsible for 42 percent of US crude oil production and 25 percent of total domestic natural gas output.
- The Texas workforce is the second largest in the US, at 14.2 million, well ahead of Florida (10.1 million) and New York (9.1 million).
- As of December, the unemployment rate in Texas was higher than the national jobless rate at 7.2 percent versus 6.3 percent. Pandemic-related re-closures hurt the state’s labor market after it had initially made a good recovery over the summer.
Takeaway (1): the 10-day forecast for Dallas calls for temperatures to rise to the 40s on Saturday and over 50 past that, so we expect the state to be able to return to relative normalcy soon. We were on a client call with a Dallas firm today and heard first-hand about widespread power outages, frozen pipes in residential buildings, and other serious problems. We hope that forecast is correct.
Takeaway (2): we would more liken Texas’ severe winter weather to a hurricane rather than a northeast snowstorm. Our client said “if you know any good plumbers, send them to Texas…” The same is probably true of many trades, especially in the energy industry. The cold weather has caused real damage which will need repair. All this should help the Texas economy over the next few months, both in terms of employment and economic output.
Texas EIA Data: https://www.eia.gov/state/print.php?sid=TX