Tech Boom Benefits Imports Not US Economy

Despite headlines to the contrary, the recent strong 3.4% increase in GDP was driven by one-time events. The strong print was driven by an anomalous 1% contribution from government spending driven by defense, and by above average spending from consumers, which contributed 3.1% to the increase. Investment spending only contributed a net .3% as most tech spending that comes from imports was largely offset by the 3.3% decline in housing investment that is primarily domestic spending driven.

Year over year GDP growth is a very sluggish 2.1% which is over 1% below the post WWII average of 3.1%.  Year over year growth is driven by steady consumer spending contributing 1.6%, government spending contributing .2% and investment only contributing .3% as the domestically driven residential investment slow down largely offsets import dominated tech spending. Investment spending has contributed an average of over .8% to economic growth since WWII. Consumer spending is also sluggish with average consumer spending contributing 2% to growth on average since WWII.

We are forecasting that economic growth slows to only 1.5% next year as the deepening recession in housing investment caused by hawkish Fed policy offsets the domestic portion of strong tech investment. We also expect government expenditures to decline due to the wind down of the Iranian war and consumer spending to be flat contributing 1.6% to growth.

The Fed should back off its irrational rate increase policy as monetary policy should focus on core inflation not inflation driven by oil prices. The Fed should recognize its primary impact is on the interest sensitive sectors of the economy which is dominated by housing.  If the Fed had focused on the housing sector in early 2021 it would have avoided its historic “transitory” blunder as housing prices in early 2021 were surging by 20% Y/Y in response to the zero percent Fed Funds rate. The Fed’s most recent policy error indicates a need for fundamental reform of its forecasting models, arbitrary 2% inflation target and the deeply flawed inflation indices it follows. We are looking forward to the Fed’s task force results that may address some of these fundamental flaws.