Fourth Quarter 2017: This is (not yet) the Summer of 1969
What a difference a year makes. It is hard to recall but at the turn of calendar to 2017 investors were debating whether stronger economic growth would ever return, largely because it had been so weak for much of late 2015 and 2016. Indeed, even as consumer and business confidence surveys were pointing to a brighter future, many investors were losing patience waiting for them to be reflected in strong “actual” economic growth. Indeed, the debate on Wall Street became whether the historical link between “soft” survey or feelings based data and actual “hard” bean-counting economic growth (Gross Domestic Product -GDP) was broken.
We expressed our belief that soft data surveys had earned the right to be called leading economic indicators because they had historically lead the hard data. Put more simply, before you “actually” act, you must “feel” confident first. And right on cue economic growth over the past three quarters has accelerated. After back to back 3% plus quarter over quarter real economic growth in Q2 and Q3, the U.S. economy looks set to post 3% plus Q4 growth. This would mark the first time since late 2004 that the U.S. economy has posted three consecutive 3% plus quarters in a row.
And this growth expansion has occurred before tax reform has taken hold. While much of the current tax reform chatter revolves around the intermediate to longer term outcome, we believe that argument is highly subjective because the economic models that are being used to moderate the discussion, have high margins of errors. Allow us to focus on the more precise, nearer term effects of this bill. Put simply, it is fiscal stimulus. And this stimulus is occurring at a time when future indicators of growth already look rather robust.
If the return of stronger economic growth was the big surprise story of 2017 after a period of weakness in the prior years led many to doubt its return, we believe the return of inflationary pressures that will eventually result from this growth will become the big surprise story of 2018; again, against a substantial wall of doubt.