MAGAnomics continues....

Third Quarter GDP +1.9%, Main Street Consumer Spending Way Up, 

Goods: +$64B, Services +$36B, Disposable Income +4.5%

Wait,… what? Who cancelled the recession?

Remember when the financial media and democrats were assuring everyone the U.S. economy was g.u.a.r.a.n.t.e.e.d to enter a recessionary phase? Well, apparently MAGA Trump cancelled it… with the help of millions of U.S. middle-class workers who are spending their wage increases, bigly.

The Bureau of Economic Analysis releases the third quarter (Q3) GDP growth estimate today, and the overall Q3 GDP growth is +1.9 percent. However, behind the economic growth stats the scale of U.S. Main Street strength is the real story.

[BEA pdf link – table 3]

Main Street consumer spending was up $64 billion on goods and $36 billion on services. As those who follow MAGAnomics closely will remember, the Main Street economy is founded upon middle-class spending. Strong jobs, wage growth, low taxes, low inflation, and low energy costs, means more disposable income.  Disposable income grew 4.5% in the third quarter.

The U.S. economy is strong because approximately 80% of everything produced inside our economy is consumed inside our economy. As long as the underlying jobs market stays strong, consumer spending leads to self-fulfilling economic expansion. Main Street is doing very well.

The weakness is Wall Street investment into expanded production of goods in the U.S.

For 30+ years Wall Street has been investing overseas for production of goods; and with that process U.S. jobs were lost. President Trump has positioned the best return on production investment as the U.S.  Tariffs on China and the EU bolster that approach.

The key to reignite domestic investment is to pass the USMCA trade agreement which will provide certainty and allow corporate CFO’s to calculate Total Cost of Production (TCP). Once TCP can be calculated within the 5-year and 10-year rolling business plans, manufacturers will be able to determine specifics of U.S. investment; and/or retraction from Asian investment.

Unfortunately, Nancy Pelosi knows the USMCA ratification is the key corporate investors are looking toward. As a result, and with the intent to keep the Trump economy as favorable as possible for her 2020 ambitions, Pelosi is stalling the passage of USMCA.

China and the EU continue to struggle as the U.S. economy remains strong.   China and the EU devaluing their currency is driving up the value of the dollar, and dropping the import cost of goods.  As a result, despite the tariffs, the U.S. continues to import deflation (lower prices of imports).  Domestic production is healthy and inventories are turning.

The negative ‘spin’ from Reuters:

WASHINGTON (Reuters) – U.S. economic growth slowed less than expected in the third quarter as a further contraction in business investment was offset by resilient consumer spending, further allaying financial market fears of a recession.

The Commerce Department’s report on Wednesday was, however, unlikely to discourage the Federal Reserve from cutting interest rates again amid lingering threats to the longest expansion on record from uncertainty over trade policy, slowing global growth and Britain’s imminent departure from the European Union.

The Trump administration’s trade war with China has eroded business confidence, contributing to the second straight quarterly contraction in business investment. The fading stimulus from last year’s $1.5 trillion tax cut package is also sapping momentum from the expansion, now in its 11th year. (read more)

Monetary policy from the FED cannot yet impact inflation.  Exactly as CTH predicted in 2016:

2016 […]  Understanding the distance between the real Main Street economic engine and the false Wall Street economic engine will help all of us to understand the scope of an upcoming economic lag; which, rather remarkably I would add, is a very interesting dynamic.

Think about these engines doing a turn about and beginning a rapid reverse.  GDP can, and in my opinion, will, expand quickly.  However, any interest rate hikes (monetary policy) intended to cool down that expansion -fearful of inflation- will take a long time to traverse the divide.

Additionally, inflation on durable goods will be insignificant – even as international trade agreements are renegotiated.  Why?  Simply because the originating nations of those products are going to go through the same type of economic detachment described above.

Those global manufacturing economies will first respond to any increases in export costs (tariffs etc.), by driving their own productivity higher as an initial offset, in the same manner American workers went through in the past two decades.  The manufacturing enterprise and the financial sector remain focused on the pricing.

♦ Inflation on imported durable goods sold in America, while necessary, will ultimately be minimal during this initial period; and expand more significantly as time progresses and off-shored manufacturing finds less and less ways to be productive.   Over time, durable good prices will increase – but it will come much later.

♦ Inflation on domestic consumable goods ‘may‘ indeed rise at a faster pace. However, it can be expected that U.S. wage rates will respond faster, naturally faster, than any monetary policy because inflation on fast-turn consumable goods becomes re-coupled to the ability of wage rates to afford them.

The monetary policy impact lag, caused by the distance between federal action and the domestic Main Street economy, will now work in our favor.  That is, in favor of the middle-class.

Within the aforementioned distance between “X” and “Y”, a result of three decades traveled by two divergent economic engines, is our new economic dimension….  (more)