AGF Management : A 30% Third Quarter GDP Rise?

Insights and Market Perspectives

Author: 8

September 18, 2020

THE OCTOBER ECONOMIC SURPRISE: Never mind that the economy seems to be cooling without more stimulus - a big surprise will come on Oct. 29, when the Commerce Department releases its advance estimate of third quarter GDP growth.

THE HEADLINE NUMBER WILL BE ASTONISHING: Many economists are predicting a rise of more than 25% - the Atlanta Fed is predicting a 32% third quarter increase.

IT'S THE ECONOMY STUPID: As James Carville famously proclaimed, the economy is usually the key election variable. A GDP number close to 30% will give Donald Trump bragging rights in the final week of the campaign.

OF COURSE, THE COMMERCE DEPARTMENT REPORT will simply make up for the horrible second quarter number, which showed the economy contracted by 31.7%. But that caveat will be ignored by Trump, who will boast that the the economy (and the unemployment rate) are headed in the right direction.

THE IRONY IS THAT THE ECONOMY seems to be running out of steam in the last few weeks; recent data have reinforced an overwhelming view among experts - including Fed Chairman Jerome Powell - that more stimulus is urgently needed from Congress.

PRESSURE CONTINUES TO MOUNT on House Speaker Nancy Pelosi to accept a compromise, perhaps a spending package in the $1.5-$1.7 trillion range. She's holding out for $2.2 trillion. A deal for about $1.8 trillion could come together easily if Pelosi and Steve Mnuchin could settle in that range; Trump undoubtedly would endorse it.

CONGRESSIONAL REPUBLICANS WOULD HOWL that such a deal would drive the deficit even higher, but the deficit isn't a major issue for the bond market - and won't be for the next few years because Powell will keep the federal funds rate close to zero.

WITHOUT A STIMULUS PACKAGE, more small businesses will close, state and local governments will lay off thousands of workers, and evictions will increase. Most members of Congress accept this outlook, but a stimulus deal is a political issue, not an economic issue.

THE DEMOCRATS WILL INSIST that a 30% third quarter growth rate would be a statistical fake-out, but they need cover - passing a stimulus bill in the next two weeks, before Congress leaves town, would give them something to brag about. Doing nothing would reflect poorly on them and Pelosi.

IT'S THIS SIMPLE: If Trump loses, the major reason will be his disastrous handling of the virus. If he wins, his handling of the economy will be the major reason; voters give him decent grades on this issue.

STILL TOO SOON TO MAKE A FINAL CALL: We're waiting until the Sept. 29 presidential debate, which should have record TV ratings and will set the tone for the final month of the campaign. In the meantime, we repeat our mantra: you underestimate Trump at your own peril; he'll have a field day with a 30% third quarter GDP rise.

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF's suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

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