Even before the GDP report was printed this morning David Rosenberg, chief market strategist of Gluskin Sheff in Toronto, was predicting that the news analysis of today’s report would be infested with “fake data.”

Back in March, the perspicacious contrarian predicted a 20% stock market correction, and he has said the U.S. economy will be in a recession within the next 12 months, so he definitely has a horse in the race.

But he is one bear well worth listening to. Rosenberg predicted the subprime mortgage credit bubble more than a decade ago when he was chief North American economist at Merrill Lynch. This time he sees many parallels in the corporate debt-to-GDP ratio, not the mortgage-backed securities market.

Acknowledging that the second quarter GDP report will be strong, Rosenberg believes it sadly will be the last good quarter in the current cycle. During this year's second half, the Fed's quantitative tightening will kick in just as the stimulus from tax cuts winds down.

And that's without any side effects from on-again, off-again trade skirmishes, which are likely to dampen the capital spending boomlet. Some think the second quarter numbers benefitted from companies' decision to accelerate purchases of goods that could be subject to future tariffs.

Ballooning corporate debt, often used to repurchase company stock, could be a major factor behind the coming slowdown that Rosenberg envisions. He cites reports from Moody’s arguing that “leveraged loan covenants are now the weakest they have ever been.” Within the next two years, investors can expect to hear terms like “fallen angels” and “destruction of value” move from the Wall Street lexicon to Main Street.

If the economic expansion lasts another year, it will be the longest in American history. In Rosenberg’s view, however, the U.S. has simply extended the cycle and solved the nasty problems arising from the last debt bubble by creating another.

He also challenged the view that the U.S. economy has broken out to the upside, although he acknowledges most investors believe what he calls “fake data.” That includes the editorial page of The Wall Street Journal.

Rosenberg writes that the newspaper’s claim that the economy is growing at a faster than 3% rate for the first time in 12 years is “patently false.” The peak during the current cycle came in the first quarter of 2015 when year-over-year GDP growth (an average of the last 4 quarters) hit 3.8%.

The bigger issue for Rosenberg is that he doesn't buy into the narrative propagated by the WSJ editorial page and others that the Trump economy is very different and a whole lot better than the Obama economy. Measured by certain metrics, he has a point, even if a 4.0% unemployment rate is marginally better than a 4.7% number.

U.S. GDP growth averaged 2.3% from 2013 through 2016, the same exact figure it recorded in 2017. And the two years with the weakest job growth in the last eight were 2010 and 2017, according to the news page of the WSJ, not the editorial page.

In both 2010 and 2017, the U.S. economy added just over 2 million jobs.The best year of the last nine was 2014, when the economy created just under 3 million jobs.

Job growth during Trump's first 18 months in office, when the economy created 193,000 jobs a month, is almost identical to Obama's last 18 months, when it added 206,000 jobs a month. Whatever side you are on, there is little question that this entire recovery has been distinguished by its length, not its strength.

But as Glenn Hubbard, who advised President George W. Bush and presidential candidate Mitt Romney, has noted, there is one area where Trump has outshined his predecessor without doubt. He is a far more exuberant cheerleader for both the economy and the stock market than Obama ever was.

Ever since President Trump was elected, Rosenberg has been predicting bad things will happen to the U.S. economy—ranging from a trade war to an accident triggered by the president’s freewheeling style. So far bad things haven't happened, even though it's been a wild ride. That said, Rosenberg wasn't exactly an optimist before the 2016 election.

But on one issue he seems to see eye-to-eye with Trump: Both think the Fed is overly aggressive, and Rosenberg believes a policy error by the U.S. central bank will cause the 2019 recession he anticipates.

Other economists believe this current quarter's GDP figure will be inflated by soybean purchases—America is the Saudi Arabia of soybeans and wheat—and excess inventory accumulations triggered by fears of trade tariffs. Go figure.

My own bet is that when second quarter GDP is announced it will exceed 5% for only the third time since 2000. The two other 5% quarters came in 2003 and 2014. Let’s just say this century hasn’t gotten off to a robust start.

July 27, 2018

Well, I was wrong. But 4.1% is still pretty good. Hopefully, it can just stay above 3% for the foreseeable future.

The stock market seems unimpressed, but year-over-year GDP growth just hit 3.1%, good but hardly white hot. That might just be the right number to extend the recovery and simultaneously keep the economy from overheating.