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Must-know: Why nominal growth is back to pre-crisis levels

James Malthus, Macro Analyst

Most data released on Thursday beat expectations

Investors received another pile of economic data yesterday. Q3 real GDP came in at 3.6% annualized, crushing the 3.0% expectation. Nominal GDP, meanwhile, was 5.5% annualized, which is very close to the 5.6% average between 1985 and 2006. Why does that average matter? Because it shows a normalization of monetary policy to pre-crisis levels.

Volatility in nominal growth is a significant driver of unemployment and business cycles. With growth now stabilizing, the stage is set for continued gains in equities. This is a long-term outlook, outside of the short-term “good news is bad news” market reactions to potential Fed actions.

Higher-frequency data confirms the GDP print

Core PCE (personal consumption expenditures) were 1.5% annualized, initial claims were 298 thousand, and factory orders shrunk 0.9% month-over-month. The takeaway is that the economy is improving, which gives the Fed reason to scale back asset purchases sooner. This could be good or bad for stocks, depending on how the Fed manages the market’s expectations for future policy.

Recently, Fed officials have been trying to downplay asset purchases and talk up forward guidance, which is the management of expectations of future interest rate. The idea the Fed wants to catch on is that “tapering isn’t tightening,” but the market doesn’t seem to buy it. And if investors think that tapering is tightening, it effectively is tightening. This is because investment is the main driver of volatility in GDP, and since volatility in GDP is a driver of business cycles, investors’ perceptions of policy actions make them reality.

So the question, as always, comes back to what the Fed will do. FOMC members still seem to have 2008 on their minds, and I wouldn’t bet on them doing anything contractionary until that memory fades a bit.

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