Everyone focuses on Real GDP, which is adjusted for inflation. I have always focused on Nominal, which is the actual number. Companies report earnings in nominal dollars and pay nominal interest payments on their debt and nominal dividends.
While there will be some talk today about the Real GDP, which grew 2.5%, being a little stronger than it expected (2.3%), I think that the real focus should be on the 5% Nominal GDP growth. This is the first time it has been this high since Q1 and Q2 of 2010 and Q4 of 2009. Before that, you have to go back to 2007.
Why is this important? A little inflation will go a long way to helping us grow out of this debt overhang. We have been seeing shifts between real GDP and inflation such that high real GDP prints have been accompanies by low inflation and, more recently, both have been low. We need nominal growth to pay back all of the nominal debt at the government and individual levels.
The "Goldilocks" scenario is that we can have just enough inflation on an economy that grows in real terms modestly, and today's GDP report smells like Goldilocks. Markets LOVE Goldilocks...
This kind of report screams to sell bonds. The 10-year Treasury over long periods of time tracks nominal GDP. One quarter isn't a trend, but there is tremendous risk in my view to holding long Treasuries if we find Q4 ends up being like Q3.
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