Upside Surprise in First-Quarter U.S. GDP Growth

Chief Economist (US), RDQ Economics

John Ryding

Chief Economist (US)

RDQ Economics

RDQ Economics provides global macroeconomic consulting services with an emphasis on U.S. economic fundamentals and monetary policy.  
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Our views are driven by consistent application of classical economic and monetary principles and has generated superior anticipation of changes in the stance of monetary policy and of movements in economic growth and inflation.
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The founders of RDQ Economics—John Ryding and Conrad DeQuadros—worked together on Wall Street for a decade, in the independent research space for nine years, and have experience in central banking at the Federal Reserve and the Bank of England.  John and Conrad have worked closely with fixed income, foreign exchange, and equity traders and portfolio managers, which has enabled their analysis and advice to be tailored to a clientele that is focused on trading and investment decisions.

Macroeconomics

<ul>
<li>Using a simple economic relationship between real GDP growth and the unemployment rate, we show that the pace of potential output growth for the economy is rising.  Over the last two years, we peg potential growth at 2.2%</li>
<li>Accelerating productivity appears to be behind the faster pace of trend growth.  The source of the faster pace of productivity growth, however, does not appear to be higher investment spending.  </li>
<li>Estimates of the neutral real rate of interest, or r*, have been tied to the rate of potential real GDP growth.  Rising potential growth, therefore, has the potential to push the neutral rate of interest higher.</li>
<li>Fed estimates of r*, however, appear to be around 0.6%, which look low against the backdrop of rising trend growth.  We believe that these estimates will move upwards as will the real yields in the TIPS market as potential growth moves higher.</li>
</ul>


Using a simple economic relationship between real GDP growth and the unemployment rate, we show that the pace of potential output growth for the economy is rising.  Over the last two years, we peg potential growth at 2.2%
Accelerating productivity appears to be behind the faster pace of trend growth.  The source of the faster pace of productivity growth, however, does not appear to be higher investment spending.  
Estimates of the neutral real rate of interest, or r*, have been tied to the rate of potential real GDP growth.  Rising potential growth, therefore, has the potential to push the neutral rate of interest higher.
Fed estimates of r*, however, appear to be around 0.6%, which look low against the backdrop of rising trend growth.  We believe that these estimates will move upwards as will the real yields in the TIPS market as potential growth moves higher.


Accelerating Productivity Points to Faster Potential Growth and Higher R-Star