The GDP numbers for the US came out again and they were weaker than anticipated, coming in at 2.2% for real GDP growth instead of the 2.5% expected. With the GDP deflator also being low at 1.5%, nominal GDP growth was only 3.7%. I should point out that there is a good historical relationship between nominal GDP growth and corporate profit growth. This should make sense in that deviations can only represent aggregate margin growth or compression. Since we know that margins are cyclically high, it stands to reason that the lower nominal GDP path must eventually be mirrored by lower profit growth. At this point in the business cycle, almost all of the productivity gains from cutting have been realised. Therefore, I expect the lower nominal GDP path to be reflected in lower earnings growth.
As a quick note here, I should note that that GDP deflator used to get real GDP from the nominal GDP deflates only domestic product. It is not a substitute or proxy for domestic price inflation and should not be considered as such.
Even so, the number was low. And there has been a lot of hubbub about Ben Bernanke backing away from the reflationary ideas he espoused when Japan was fighting deflation in the late 1990s. The underlying message of the chatter is that Bernanke has changed his tune and has decided for whatever reason not to employ the reflationary tactics in the US that he advised for Japan. More importantly, the message here is that the Fed is holding back a more robust economic recovery by not adding more stimulus. I find this whole debate irrelevant. The Fed is out of bullets. The interest rate channel is done. It can only use inflation and interest rate expectations to shift portfolio preferences and get investors to take on more risk. Investors’ taking on more risk does not translate into real economic growth, however. Let’s not confuse risk assets with the real economy.
If we want to see changes in the real economy, we need to see more income in the hands of consumers. It’s as simple as that.
That’s it. Here are the links.