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What Do Last Week’s GDP Numbers Mean?

In a nutshell, the U.S. economy continues to grow at a blistering pace. Last week’s GDP (gross domestic product) report estimates that the economy grew by 4.1% in the second quarter, the fastest quarterly pace since 2014. This was driven in no small part by consumer spending, bolstered by a strong job market and consumer balance sheet, and trade activity, in anticipation of increased tariffs.

Other economic indicators are also healthy. The unemployment rate is near historic lows and jobs are being created at an average pace of nearly 200,000 per month over the past year. The Fed, which meets again this week, continues to raise rates slowly and steadily in response to solid growth.

This contrasts with the day-to-day concerns that many investors may have. These include the impact of trade tariffs and market movements in specific sectors, such as tech stocks. Additionally, the yield curve, which often functions as an early-warning sign of the late stages of an economic cycle, is extremely flat with long-term interest rates still stubbornly low. While some of these are real concerns, they are a reason to exercise discipline and balance, rather than a reason to be fearful of the markets.

1. The economy is healthy

gdp growthThe good news is that, despite being in the tenth year of the economic expansion, the economy is still healthy. GDP growth in the second quarter measured 4.1%. As shown in the chart above, only four other quarters this business cycle have experienced faster growth.

Ultimately, the steadiness of economic growth is just as important as the pace of growth. This is illustrated in the next chart.

2. Long run growth is slow but steady

us business cycles

This chart emphasizes how extraordinary this business cycle has been. This is the second longest economic expansion on record – only the 1990’s was longer.

However, the pace of growth has been significantly slower. The chart above also shows the path of economic growth during the eleven recessions and subsequent expansions since World War II. It’s easy to see that the ten-year cycle during the 1990’s grew three times faster than the current cycle.

However, it’s not just about the sheer pace of growth – the fact that growth has been steady has been enough to reduce unemployment to historic lows and generate strong corporate profits, pushing stocks to record highs.

3. The yield curve is flattening

yield curveSo where does that put us in the business cycle? Many measures such as the unemployment rate and inflation suggest that we’re in the later stages of the economic expansion. The yield curve also reflects this. But how long the current growth cycle will last is anyone’s guess.

Interest rates have risen this year, but not all at the same pace. While the 2-year Treasury yield is at a cycle high of almost 2.7%, the highest since Lehman Brothers collapsed, the 10-year is still stuck below 3%. And the difference between the 30-year and 10-year yields is only 0.13%!

Although a flattening yield curve is often a sign that we’re in the late stages of the business cycle, it’s not a perfect signal. It is no doubt being distorted by foreign demand for U.S. Treasuries. Regardless of the cause, however, it could place pressure on economic growth and Fed policy.

While this may be a volatile market in the short-run, long-term economic growth is still healthy. As always, stay disciplined and stay diversified.

Source: Clearnomics

Mike Minter

As Chief Investment Officer, Mike directs the overall investment strategy, develops portfolio allocations, oversees trading and rebalancing, and conducts research and analysis. As a perpetual student of investing and the markets, Mike considers himself obsessed with the subject. He has earned the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Certified Fund Specialist® designations. He is also an active member of the Houston chapter of the Financial Planning Association (FPA).   Read Mike’s Profile HereRead More Articles by Mike

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