The economic data over the last two weeks continued the better than expected trend. Some of the data was quite good and makes one wonder if maybe, just maybe, we are finally ready to break out of the economic doldrums. Is it possible that all that new normal, secular stagnation stuff was just a lack of animal spirits? Is it possible that the mere anticipation of tax cuts was sufficient to break us out of the 2% growth paradigm? Or are there other factors that have us on the precipice of a third consecutive quarter of 3%+ growth? 

It is easy to find the positives in the economic data these days. retail sales surged last month and are now up nearly 6% year over year. Wholesale sales are up over 8% and inventories are improving relative to sales. Imports and exports are up 7% and 5.6% respectively. Factory orders are rising at about a 4% clip. Productivity was up 3% last quarter. The Fed's worries about inflation also seem reasonable considering CPI and PPI well above the Fed's target rate of inflation. Import and export prices are both up over 3% year over year. With the unemployment rate down to 4.1% you can understand why the Philips Curve disciples are getting antsy.

But that's just a snapshot, a particular moment in time. Some of this recent surge is certainly due to recovery spending after two big hurricanes in September. It is impossible to gauge the size of the impact yet but there is no doubt that insurance money is flowing into the affected areas and being spent. That shows up in higher sales today but it isn't likely to be repeated soon and it will start to taper off soon. Take into account both numerator and denominator when you look at those improving inventory/sales ratios. Productivity? Yes, it was up 3% last quarter but the longer term trend hasn't changed with the year over year rate only 1.5%. Inflation? With unit labor costs down 0.7% year over year? With capacity utilization at only 77.1%? There is no supply side constraint globally and demand is shackled by debt. Headline inflation is mostly driven by fluctuating oil prices while the core remains tepid. Inflation might be a problem someday but not right now.

The questions in the opening paragraph are not easy ones to answer. Indeed, they may be impossible to answer, at least until we have the space of time to look back on the period and make some definitive observations. But don't even count on that much; economists are still arguing about the Great Depression nearly 90 years after the fact. Observing the economic landscape and speculating about the causes and effects is not a process with a great track record. You can slice and dice the data any way you wish, psychoanalyze the entire planet and you still can't predict the future. Just ask the Fed, which has basically unlimited resources for economic analysis – and a track record that makes astrologers look good by comparison.

Since we can't even begin to match the Fed's budget for economic forecasting, we generally don't try to predict the future. Yes, we do occasionally indulge our urge to speculate about the effects of economic policy but usually only in a very general way. For instance, we don't believe the tax bill – with the biggest changes in corporate taxes – will have a large impact on economic growth. That isn't based on a deep dive into the details of the bill which is enormous and way too boring to actually read unless you are a CPA or tax lawyer. It is merely an observation that corporate profits and margins are already near all time highs and companies are still choosing to pay dividends, buy back stock and make acquisitions at all time high prices rather than make capital investments. The tax bill does not relieve some constraint on the economy and so seems unlikely to create a surge of growth.