As you can see below, Trump’s tax “plan” was more of a tax guideline or a list of tax principles rather than an actual, detailed tax plan.
— Zeke Miller (@ZekeJMiller) April 26, 2017
Moreover, the “new” tax plan looks like a tweaked version of The Donald’s original tax “plan” from last year. It’s therefore no real wonder why the market wasn’t very impressed.
And while the Greenback did weaken a bit when the tax “plan” was revealed, there were no explosive moves, very likely because the market set a rather low bar on this event.
With that said, the U.K. ain’t the only one with a GDP report scheduled for release tomorrow, since the advanced reading for Q1 2017 U.S. GDP will be revealed tomorrow as well (April 28, 12:30 pm GMT).
Oh, also note that like the U.K. GDP report, the U.S. GDP report also comes in three versions: (1) the first or advanced estimate (2) the second or preliminary estimate, and (3) the third and final estimate. And the GDP report scheduled for release tomorrow is, as the title says, the advanced or first estimate.
How did the Greenback react to Q4 2016’s advanced estimate?
The U.S. Bureau of Economic Analysis (BEA)released the advanced estimate for Q4 2016’s GDP growth way back on January 27.
And back then, I concluded in my preview for the Q4 2016 GDP report that “the available economic reports are pointing to a downturn in trade. And since trade was a major growth driver back in Q3, the poor readings for trade will likely weaken GDP growth.”
And, well, the advanced estimate for Q4 GDP was rather disappointing because GDP only expanded by 1.9% quarter-on-quarter annualized, missing the +2.2% consensus. In addition, GDP growth slowed from Q4’s 3.5% rate of expansion, putting an end to two straight quarters of ever faster GDP growth.
Looking at the details of the GDP report, the weaker reading in Q4 was indeed due mainly to the drag from trade, with net trade subtracting 1.70% from total GDP growth after adding 0.85% to GDP growth previously. And the drag from trade, in turn, was due to exports falling by 4.3% and imports rising by 8.3%.
Weaker consumer spending also contributed to the slowdown in Q4, since total personal consumption expenditure only added 1.70% to total GDP growth (+2.03% previous).
The weakness in these two components was partially offset primarily by higher private domestic investment, which added 1.67% to GDP growth (+0.50% previous).
Overall, the advanced Q4 GDP report was rather disappointing. As a result, the initial reaction was to drump the Greenback. However, follow-through selling was limited, very likely because faith in Trump’s fiscal stimulus plans was still rather strong at the time.
That’s to be expected I suppose. After all, I did warn in my preview for Q4 2016 GDP that (at the time) “the market has a more forward-looking attitude towards the U.S. economy and the Greenback. And most of that is based on what The Donald has to say or does, so follow-through buying or selling based on the GDP report is not likely.”
How did the final estimate for Q4 turn out?
The reading for Q4 2016 GDP growth was left unchanged at +1.9% quarter-on-quarter annualized during the second estimate. However, the reading was revised higher to 2.1% in the third and final estimate.
The upgraded reading apparently reflects a stronger positive contribution from consumer spending, with personal consumption expenditure now adding 2.40% to GDP growth (+1.70% originally).
The higher contribution from consumer spending was partially offset by the downward revision to the positive contribution from gross private investment (+1.47% vs. +1.67% originally), as well as trade being more of a drag than originally estimated (-1.82% vs. -1.70% originally).
What’s expected for Q1 2017’s advanced GDP estimate?
Forecasts for Q1 2017’s GDP growth vary, so there’s no real consensus among economists. Estimates generally fall between 1.0% to 1.3% quarter-on-quarter annualized, however, so most economists at least agree that U.S. GDP growth slowed further in Q1 2017.
A further slowdown may be right, based on the available GDP components.
Retail sales had a good start in January by printing a 0.6% month-on-month increase, but the other Q1 months were disappointing, with retail sales falling by 0.3% in February and another 0.2% in March. In contrast, retail sales printed monthly increases during all the Q4 months. Consumer spending therefore likely weakened in Q1 2017.
Trade may also be a drag yet again since the trade deficit in January and February already totaled to about $91.73 billion versus the $132.32 billion for all of the Q4 months.
However, these potential drags may be offset by higher residential investment, since the housing starts and building permits issued in Q1 2017 were generally higher compared to Q4 2016.
In addition, industrial production fell by 0.3% month-on-month in January, but February printed a 0.1% recovery and March printed a solid 0.5% increase.
Looking at some of the publicly available GDP forecasts from other institutions, the Atlanta Fed’s GDPNow as of April 18 is one of the most depressing, since the Atlanta Fed is forcasting a feeble growth rate of only 0.5%. This very weak forecast is based on drag from trade and expectations that inventories would subtract 0.76% from GDP growth because of higher industrial production in Q1.
And to highlight the lack of consensus, the New York Fed’s Nowcast as of April 21 is forecasting a very optimistic 2.7% rate of expansion, which is much faster than Q4’s +1.9%. The New York Fed also expects trade to be a drag, but unlike the Atlanta Fed, the New York Fed forecasts that inventories would add to GDP growth. In addition, the New York Fed also thinks residential investment picked up in Q1 2017.
As for Moody’s Analytics, it’s forecasting a 0.7% pace of growth as of April 26, which is a bit faster than the Atlanta Fed’s depressing +0.5% forecast, but still below the general forecast range of 1.0% to 1.3%. Anyhow, Moody’s also thinks that trade suffered in Q1, but Moody’s placed more weight on the weakness in retail sales.
Overall, the available economic reports are mixed, but trade and consumer spending will likely be drags, so chances are more skewed towards a slowdown. However, there are some conflicting forecasts on whether inventories will have a negative or positive contribution to GDP growth.
With that said, just remember that an upside surprise usually stokes demand for the Greenback, at least in the short-term. On the flip side, a downside surprise usually results in the Greenback getting dumped.
However, keep in mind that unless the GDP report is significantly better or worse than expected, traders will likely be wary of follow-through selling or buying, since focus will likely shift towards the possible government shutdown, although that possibility seems to be fading already.