The Bureau of Economic Analysis (BEA) will unveil their ‘advance estimate’ for the 3rd quarter tomorrow morning at 5:30 am, Pacific time.  Tune in to CNBC and you can watch it live!    The ‘median forecast’ is 33%.   If correct, this quarter’s figure will reflect the largest quarter-over-quarter growth figure ever.   Another first.

What a year.  In just 10 months, 2020 has already become one for the record books:  COVID-19, Australia and California wildfires, endless hurricanes, a Prince of England relocates to California, BLM, Kobe dying in that horrible helicopter crash, presidential impeachments, Quibi, murder hornets, and Planters shared with us that ‘Mr. Peanut’ passed away.   I could go on!

So understandably, with 2 months left in 2020, I’m a bit worried.   Let me tell you, if I see swarms of locusts and 100-pound hailstones coming my way, I’m packing up and heading for a long hibernation in a cave in the Canadian Rockies. 

Welcome to this week’s Steak House Index update.

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.  

But is the US economy expanding or contracting?

Before COVID-19, the world’s annual GDP was about $85 trillion.  No longer.  It shrank.   Until recently, annual US GDP exceeded $21.7 trillion.  Again, no longer.  According the the Q2 final numbers, annual US GDP is down to $19.5 trillion.  We can thank the Great Lockdown for this one.  But what has not changed is the fact that together, the U.S., the EU and China still generate about 70% of the global economic output.  

The objective of this blog is singular.

It attempts to predict the direction of our GDP ahead of official economic releases. Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.

Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore related items of economic importance.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

The Blog:

If it hasn’t become apparent to you yet, I’m a big movie fan.  ‘Kingdom of Heaven’ is an epic 2005 film directed and produced by Ridley Scott.   The story unfolds in the 1100s, during the Crusades in the middle east.  Near the end of the film the star, Orlando Bloom, finds himself as the man responsible for protecting the Christian occupants of the city of Jerusalem against an attacking force led by the powerful and respected Muslim leader, Saladin.  Eventually, with the promise of safe passage, Bloom surrenders the city and Saladin’s forces take, and occupy, Jerusalem.   Later, as all the citizens vacate and walk away from the city, Bloom asks Saladin, “What is Jerusalem worth?”  Saladin answers:  “Nothing.” … A moment later, he looks up, smiles, and says, “Everything!”

In my opinion, tomorrow’s GDP reading is worth the same.   Nothing.  And, at the same time, everything.  Let me explain. 

Everything:  In 1942, the US achieved a pinnacle of economic growth:  Our economy grew 18.9% that year.  That record has never been broken.  Until now.  I expect tomorrow’s number to be higher.  In fact, if the Atlanta FED forecast for 2020 Q3 GDP is accurate, tomorrow’s (annualized growth) number could be as high as 37%.   A reading this high is both staggering and unprecedented. 

The NYC FED ‘Nowcast‘ sits in the opposite corner.  If they are correct, Q3 growth will be only 13.75% for the quarter, below the record set in 1942.   But, on the other hand, the ‘median‘ forecast seems to be around 33%, and the ‘blue chip’ panel is expecting an average of about 29%.

Of course, this follows the worst quarterly economic performance ever in Q2.   The BEA told us that US GDP shrunk by over 32% last quarter.   Ouch.   Unfortunately, The Great Lockdown ended the longest-ever US economic expansion, ushered in an official recession, and brought in its wake the largest decline in US GDP ever.  Since measurements began.  So it may come as no big surprise that Q3 has bounced back so significantly.  What goes down, must go up, right?  

No.  That is the wrong way to look at it.  This bounce back is a stunning economic achievement.   That retail sales, housing and durable good sales have remained so resilient, in the face of the lockdown and pandemic, is absolutely amazing.   During the quarter, US ‘exports’ increased and ‘imports’ fell, again fueling the GDP growth number.   All in all, the performance of the US economy during the 3rd quarter has been very, very impressive.   This is our “V” shaped recovery. 

Nothing:  One could argue this kind of a rebound is easy when the Federal government pumps about $3 trillion of stimulus into the economy.  $3 trillion resonates thru the economy and really spurs activity in the short run.   The challenge, in my opinion, is to maintain a somewhat normalized growth rate in the following quarter.  So while Q3 may set more 2020 records, I am not yet convinced the good news will carry thru to Q4.  Or beyond. 

But it might.  Our global hyper-low interest rates remain firmly entrenched.  They continue to spur home and other large-asset purchases.  The consumer remains healthy. 

The battle lines are drawn:  In this corner, we see the consumer … who continues to dip into their savings, buy new cars and houses, and support their favorite restaurant.  In that corner, we see our state and local leaders, monitoring and managing COVID infection rates with restrictions and <GASP!> possibly new lockdowns.   How exciting!  Who will win? 

Let the battle begin! 

This GDP reading comes out 5 days before the election — another epic battle.   Who will win?  🙂

May you live in interesting times.

• Terry Liebman