Graph of the week

Graph of the week

09-02-2018 | Insight

Good news for Trump!

  • Lukas Daalder
    Chief Investment Officer

Sure, we had a good laugh when Trump claimed he could raise US economic growth above 4%. Maybe our reaction was a bit premature...?

Although it didn't appear on the front page of the international newspapers, in 2017, the Eurozone beat the US for the second year running in terms of growth. While I admit we should really wait for the final figures to come out, based on the preliminary estimates, in the US, the growth rate didn't make it above 2.3%, compared to 2.5% on this side of the pond. It may not seem like such a big difference, but if you take the Eurozone's aging population into account, it's hard to deny that Europe is currently doing a bit better than the US.

It's a difference no one would likely lose any sleep over, if it weren't for President Trump sounding off so much about it during his campaign. He claimed that if elected, he would breathe new life into the US economy and that sustaining growth of 4% − or even higher − was not outside the realm of possibility. Which didn't seem all that realistic. The graph below shows the average real growth of the US economy over a period of ten years, with the red line indicating the 3% mark. As you can see, only in the 1960s was a level of 4% achieved for an extended period of time. An important difference compared to today is of course population growth, which was about 2% between the 1950s and 1960s. Assuming the figure is currently 0.5%, productivity would need to see structural growth of 3.5% in order to achieve 4%. And the idea that you can get there with tax cuts − no matter how historic they may be − is highly questionable.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates

3% was the benchmark growth, 4% is pretty unlikely

And yet...

And then came the Atlanta Fed's first forecast, which features as this week's graph. I have written about this graph on several occasions (see here and here), but basically, the Atlanta Fed's GDPNow indicator shows US economic growth during each quarter, based on GDP statistics. In other words, if you look at 26 March, the GDPNow indicator estimates GDP growth in the first quarter based on all data publicly available at that time. But remember, it is and remains an estimate: in the end, the actual GDP figures can certainly still deviate from the Atlanta Fed's latest forecast. In practice, however, its estimates have proved fairly reliable and are, for that matter, more accurate than the consensus forecasts arrived at by other economists.

So what does the Atlanta Fed's first forecast for Q1 2018 show? That's right! 4.2%! So now who's laughing...? Maybe his crazy tax reform plans weren't so crazy after all?

Unfortunately for Trump, this first forecast isn't actually all that meaningful. For example, the first forecast for the third quarter of 2017 was 4.0%, while real growth ended up being 3.2% and in the first quarter of that year, when the prediction was even higher − 4.3% − the actual figure was 3.1% Of course that's not entirely surprising: when the quarter's only just started, there aren't many January figures available, so a lot of weight is given to a relatively insignificant (weekly) figure. Only once the monthly figures have been published (which usually doesn't happen until mid-February), is there a bit more to work with. Then the prediction becomes more reliable.

As it turns out, The forecasts are often − though not always − adjusted downwards during the course of the month. Of the 15 quarters in which GDPNow has been live, eight of the figures ended up lower, four were about the same and only three were higher than the original estimate. You can also look at how the forecast changes over the quarter; below I've divided the 15 observations into three subgroups: those with high starting values, those with low starting values and those that were somewhere in between. A significant downward adjustment appears to be particularly likely when the forecast starts out high.

The first forecast doesn't tell us much

Source: Robeco, Atlanta Fed

Now, it's possible, of course, that this first quarter will be the exception to the rule. The US economy seems to being going full steam ahead now and with the added effect of tax cuts, who knows what will happen. But that doesn't mean Trump will be right. After all, one quarter does not make a 4% summer: he said it would be a sustained increase. It remains to be seen whether he can make that happen, but to be honest, I'm not really holding my breath.

Incidentally, a new update will be published today, so we will soon see whether 4.2% has proved realistic in this case, too.

Subjects related to this article are:

Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is Robeco Switzerland AG, Josefstrasse 218, 8005 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/Robeco Switzerland product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/Robeco Switzerland offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

I Disagree