We’ve said before that the US economy is not currently booming, this is demonstrably true. Growth in Q1 and Q2 was a nice surprise, welcome, but we’re not yet partying like it’s 1999. The past week has however seen the outlook improve markedly with our forecast for year-over-year NGDP growth in Q3 2019 waxing to 5.2% and the Hypermind market for Q1 2019 hitting a similar number. Our forecast system, which produces projections for all quarters in the coming year, has the Q1 2019 figure at nearly 6%, well ahead of Hypermind. If we actually see a few quarters of 5%+ YoY, well then maybe we’ll use the “B” word.
Since we upgraded our market-driven forecast engine in August, the forecast has risen from around 4.6% to the current 5.2%. As the NGDP revision in this interval was minimal, this improvement has been entirely driven by improvements in the market outlook. Digging into the data, we see that the improved outlook is broadly shared across the asset prices we consider. Oil, the S&P 500, short-term Treasury yields, 5-year TIPS spreads, 5- and 10-year Treasury yields, and four of the five yield curve spreads we use have all improved. About the only asset that hasn’t moved in a bullish direction is copper, which is likely reflecting weakness in the tariff-hobbled Chinese economy.
Some might object to our methodology and we welcome constructive criticisms. But if you take the Efficient Markets Hypothesis seriously, you have to ask yourself “why are asset prices rising?”. Most likely it’s because the outlook for aggregate income growth in the US is improving. Given that the recent US NGDP growth rate is around the mid ‘four-percent ‘, our forecast of NGDP growth above 5% is entirely plausible, reasonable and perhaps even likely.
We eagerly await the Q3 NGDP estimate, which comes out in the end of October. This will give us firming footing on this bold forecast, yet the markets speak for themselves. If NGDP comes in inexplicably weak, it should follow that markets were wrong and that asset prices will fall as they certainly are pricing in growth not seen in over a decade.