The Atlanta Fed’s GDPNow forecast is among the best economic indicators for the stock market. Using economic data that has already been reported, the metric shows the likely growth of U.S. GDP for the current quarter.
Unlike other economists, the GDPNow forecast has been consistently accurate in predicting economic growth. That’s important, when investors consider the repeated calls for a recession by various prominent economists over the past year.
Moreover, for the last six months, it’s also been a pretty good indicator for predicting the performance of the stock market. During that period, GDPNow forecasts and stock market returns have both been strongly positive. For that reason, I’ve coined a new expression, based on the old expression, “Don’t fight the Fed.” (The latter expression, which is based on the idea that investors cannot obtain positive returns while the central bank is raising interest rates, has been completely disproven). My new expression is: “Don’t Fight the Fed’s GDP forecast.”
As of May 21, the GDPNow forecast stood at 2.9%. Consequently, I believe that we’re going to see a massive bull market this summer.
Here are three positive indicators investors should pay attention to that strongly support future stock price performance.
Personal Consumption Expenditures (PCE)
As of May 17, the Fed forecasts a 1.6% annualized surge in real personal consumption expenditures (PCE). (It should be noted that these numbers are all annualized. In other words, they reflect annual rates of change rather than monthly rates of change.)
According to Reuters, “Consumer spending…accounts for more than two-thirds of U.S. economic activity.” Thus, personal consumption expenditures are crucial for US companies and the economy overall. Of course, it’s also a very important metric for U.S. stocks. Consumer spending has a significant impact on various companies.
For example, General Electric (NYSE:GE) is often thought of as an industrial company, but its biggest business is making and servicing airplane engines. And airlines determine how many airplanes to buy based on how much consumers travel. Additionally, airlines must service their engines much more frequently when their planes make more flights.
Another example is Snowflake (NASDAQ:SNOW), which is a software company and “provides a cloud-based data platform for various organizations.” Many companies that have already invested in Snowflake’s platform are dependent on consumers for their revenue. Strong consumer spending can drive improved financial results for companies, increasing investor demand for said companies.
Government Spending
The Fed is predicting that government spending will increase at a real, annualized rate of 2.1% during the current quarter. Three main factors contributing to this high number are: increased hiring by state and local governments, significant investments from Washington due to the federal Infrastructure Law, and a notable rise in defense spending. Notable increases in all three of these categories are very positive for stocks in the short- and medium-term. All three of these phenomena, however, will also exacerbate Washington’s huge debt problem in the long-term.
States and local governments received $350 billion from the $1.9 trillion American Rescue Plan, providing financial relief after pandemic-induced lockdowns negatively impacted their budgets. Many states and local governments have utilized these funds to hire more workers. This hiring, in turn, boosts consumer spending, lifting many stocks.
Infrastructure Law spending is increasing, benefiting firms involved in transportation and water infrastructure. As a result, they and their suppliers are hiring more workers and paying their current employees more, causing overall consumer spending to increase.
Finally, during the current fiscal year, defense spending is slated to surge to $797 billion from $728 billion during the last fiscal year. Additionally, there are substantial funds being allocated to Ukraine, potentially utilized for purchasing American-made weapons, amounting to tens of billions of dollars. Defense companies and suppliers are boosting employment and wages, leading to an overall increase in consumer spending.
Residential Investment
Despite high interest rates (which very negatively affect the housing sector), the Atlanta Fed predicts a 0.6% real annualized increase in residential investment this quarter. Conversely, on April 28, the Atlanta Fed was predicting that residential investment would decrease at a real, annual rate of 6.9%.
According to the National Association of Home Builders, “Housing’s combined contribution to GDP generally averages 15-18%.”
As a result, the housing recovery is going to have a significant, positive impact on the American economy. What’s more, many companies will be directly aided by the rebound. These companies include homebuilders, construction firms, and raw material suppliers.
The rebound in the housing market will indirectly boost consumer spending through increased employment and higher wages. Given these points, the expected upturn in residential investment is one of the most important economic indicators for the stock market investors should be watching right now.
As of the date of publication, Larry Ramer owned shares of GE. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
