When is quarterly growth in gross domestic product bad news? Apparently, when it’s paired with monthly data showing a contraction in the most recent month, rekindling downturn fears.
That was Britain’s GDP for the last three months of 2018. The quarter was fine. But December GDP dropped, souring sentiment. My advice? Don’t sweat about December’s dip. GDP isn’t a perfect picture of economic health. Think like markets and recognise GDP’s limitations. You’ll see reality isn’t nearly as bad as feared.
At first December’s 0.4 per cent drop in GDP looks ominous. Services, production and construction all slipped — the first simultaneous drop since September 2012. The service sector is 80 per cent of GDP, so its decline caught the most eyeballs. I’m sympathetic to anyone arguing that December’s data are more meaningful than results across the fourth quarter. Quarterly data sets are inherently more backward-looking than monthly. Yet both are old news to forward-looking stocks, which have already moved on. The key for investors is to move on too.
What matters isn’t if December fell, but whether weakness sticks. The two main culprits were wholesale and retail trade. Falling oil prices affected the former. On the latter, researchers at the Office for National Statistics reckon Black Friday promotions pulled retail spending into November — a seasonal quirk, not a red flag. January retail sales bounced hugely, underscoring consumers’ health.
There is an endless tug of war between the desire for more and more fresh data and the need to tune out noise and think longer term. Monthly GDP scratches the timely information itch, but is it helpful?
The ONS has published GDP monthly for only six months, with the data set backtested to January 1997. More data aren’t inherently bad, but shorter-term data sets inevitably wiggle more. It’s human nature to get hung up on volatility — especially downward volatility — so more monthly data begets a greater temptation to tinker with investments.
The backtested monthly data show British GDP often fluctuates. According to the ONS, almost one in every four months since 1997 showed negative GDP growth. Yet GDP has contracted in only seven quarters since then, with only one recession, which ran from the second quarter of 2008 to the second quarter of 2009.
Apply the same exercise to the current economic expansion. Since the third quarter of 2009, UK GDP increased in 36 out of 38 quarters. Even in those positive quarters, 20 months still registered GDP declines.
Before last summer, the public had no reason to fret about monthly GDP figures — because there weren’t any. They could guess at monthly growth by cobbling together the monthly services, industrial production and construction indices. But that exercise is imperfect and unofficial. Now, with the official information, investors have one more thing to fear.
It’s wrong to think investors or stocks always need more data. You can do just fine without it. US investors went for two months without most economic reports, thanks to the recent US government shutdown, which included Commerce Department statisticians among furloughed workers. That delayed fourth-quarter GDP results for over a month. It also bumped monthly retail sales, international trade and factory orders — all numbers previously known to investors. And, this, after huge volatility in December had so very many fearing recession.
But markets managed to keep pricing in economic growth without them. The US’s broad stock index, the S&P 500, rose 14.2 per cent in US dollar terms between December 21, when the shutdown started, and February 13, the day before delayed data finally started emerging. Stocks don’t need official data wonks to confirm economic reality. Markets digest and pre-price all widely known information. They are forward looking. Stocks usually price in corporate earnings expectations before earnings are announced. They discount economic activity as it happens, or beforehand, rather than waiting for official, backward-looking confirmation.
Look at Italian stock returns. They priced in Italy’s recession well before it became official. Italian stocks peaked in early May, before GDP started contracting in the third quarter. They bottomed out on December 27, over a month before the preliminary fourth-quarter GDP report made the recession official.
Remember this as the dismal, Brexit-related economic forecasts keep rolling in and doomsayers over-extrapolate from every wiggle. The FTSE has seen and heard it all, and is telling you that economic calamity isn’t likely. Brexit uncertainty may weigh on relative returns, but that sunsets soon.
As I wrote here in October, simply knowing the outcome will help UK plc get on with life — even if we get a “no-deal” Brexit. Once businesses know what they are dealing with, they can unleash pent-up investment — an under-appreciated positive. By then, December’s GDP drop will be long forgotten and stocks will be pricing this summer’s and autumn’s reality.
Ken Fisher is the founder and executive chairman of Fisher Investments and chairman and director of Fisher Investments Europe. Twitter: @KennethLFisher