Fluky GDP Report Stuns Washington; What if It’s Correct?

by Greg Valliere, AGF Management Ltd.

Insights and Market Perspectives

WHAT A DICHOTOMY — The financial markets shook off yesterday’s fluky first quarter GDP report, while the politicians were stunned. There are big policy implications.

ECSTATIC REPUBLICANS could hardly believe their good fortune, as they ramped up their message that a recession is imminent; they immediately blamed Joe Biden and vowed to resist any new spending or any tax increases. Democrats insisted the report masked a solid underlying economy.

OUR TAKE IS THAT A RECESSION IS NOT IMMINENT, especially with a red-hot labor market and plenty of stimulus still in the system (California is headed for a stunning $80 billion surplus this year). But there’s one troublesome wild card: psychology.

AMERICAN CONSUMERS ARE INCREASINGLY JITTERY, as many pay $100 to fill their gas tanks and are bombarded with negative news: a China slowdown, supply chain issues, the war in Ukraine, etc.

CONSUMERS BELIEVE, incorrectly, that the budget deficit is exploding, and they want less Washington spending. Accordingly, we think yesterday’s GDP report will make it even less likely that Congress will pass any big new spending bills — and a tax hike is out of the question.

THE LEAST APPRECIATED WASHINGTON ECONOMIC STORY is the rapid pendulum shift from fiscal stimulus to fiscal restraint. And with the Republicans likely to easily capture the House in November, the rise of spending will slow even further in 2023-24.

MONETARY POLICY ALSO IS BECOMING LESS STIMULATIVE: Yesterday’s report should have no impact on next week’s likely 50 basis point rate hike, with more to come in the summer. But what if the GDP report wasn’t a fluke? The Fed can’t be absolutely certain.

THUS THERE WILL BE VIRTUALLY NO SUPPORT for a 75 basis point rate hike any time soon, and the possibility — if GDP growth disappoints again — of 25 basis point hikes in the fall, not 50 basis point increases. But that would depend on a deceleration of inflation, which does not appear imminent.

SO THE PSYCHOLOGICAL UNCERTAINTY MAY PERSIST into the summer, as consumer attitudes begin to harden, rejecting Joe Biden’s handling of the economy. Does he have any policy tricks left? Student loan forgiveness is very likely, but the Build Back Better provisions are mostly doomed. A de facto tax cut — a gasoline tax rebate — is possible, mostly at the state level.

BOTTOM LINE: Our mantra is that the froth will be extracted from the U.S. economy. That process clearly is underway, with monetary and fiscal policy tightening — imposed by policymakers who are making a very big bet that the GDP report was a fluke.




The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

©2022 AGF Management Limited. All rights reserved.

This post was first published at the AGF Perspectives Blog.

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