We’ve talked about the formula for an early 40s-like boom time economy.
We got some data today that supports it.
As we’ve discussed over the past three years in these notes (since the May 2023 “Nvidia moment”), we are (still) in the early days of the what should be the most productivity enhancing technological advancement of our lifetime — generative AI.
On that note, Q3 productivity data was reported this morning. And it was big, 4.9%. For perspective, we averaged less than 1% productivity growth for the decade prior to the pandemic.
Remember, hot productivity growth does two things: 1) creates the opportunity for the continuation of much needed real wage growth (to restore living standards, which were eroded by inflation), and 2) increases the long-term potential growth rate of the economy.
With that, if we look at the four engines of GDP — consumption, investment, government spending, and net exports — they are all firing.
The Fed is backstopping liquidity and cutting rates (more this year), which makes borrowing cheaper, makes saving less attractive and creates the confidence necessary to promote hiring. That will keep consumption going.
We know the investment story. It’s “build it here” policy incentives, which includes full expensing in year one.
The One Big Beautiful Bill is driving government spending tailwinds.
And tariff policies are aggressively narrowing the deep trade deficit — which lessens its drag on growth.
With all of this, we had a hot net exports number today. And, related, we had a hot Q4 GDP estimate from the Atlanta Fed model (now running 5.4%).
This is the kind of growth you’d expect (nominal growth around 8%), or better, after blowing up the money supply — 10 years worth of money supply growth over just a two year period in response to the pandemic.
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