Let’s get this straight. We have a -1.1% contraction in the index of aggregate hours worked being built into first quarter GDP with two months left to go, and even with that, the Atlanta Fed Nowcast is at +2.9% real GDP growth for Q1, which means productivity would have to boom again at a +4.0% annualized rate. That would take productivity over the past 4 quarters to an average of +4.0%, which is incredible and seems too early to be pinned on the AI craze since the spending binge is only now getting going. Historically, annual productivity growth of that magnitude is a 1-in-20 event.
Meanwhile, we had housing starts collapse -15% in January, industrial production inch down -0.1% after a flat December, and retail sales volumes sagging -1.1% in January and down in three of the past four months, contracting at a -4.4% annual rate since September. Yet the narrative is about how we have a roaring economy on our hands. The manufacturing ISM PMI was solid (but still sub-50) at 49.1 in January, and yet only 22.2% of the industries in the survey posted any growth at all. That number was about half in the service sector index. Industrial production in January was actually below the level it sat at in April 2022, and retail sales volumes are also lower today than they were in March 2021. Yet everyone thinks that the economy is booming.
The Chicago Fed’s National Activity Index, which contains 85 macro variables and is the most comprehensive and timely monthly measure of economic activity, came in at -0.3 in January. The three-month moving average has been below zero each month dating back to October 2022, and its level today is consistent with real GDP growth of +1.2%, not +2.9%. The Census Bureau’s index of economic activity showed the economy expanding -65 basis points below its non-inflationary potential pace in January, which again would suggest that actual growth is running somewhere around 1.0%-1.5%. All of this is very hard to comprehend, unless you are looking only at GDP and headline nonfarm payrolls. Not everything is coming up smelling like roses, as the consensus narrative and Fed commentary would have you believe.
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