Too Good To Be True

So, what is the story morning glory? If the economy didn’t grow 3.3% last quarter, what did it grow?

If it seems too good to be true, it probably is. We all know that old saw, don’t we? What’s more, it is true way more often than not. There always seems to be a catch. The devil is in the details. You don’t bother to read the fine print. The salesperson was, shall we say, a bit misleading.

To that end, I once saw a commercial on late-night television where this group was selling $2 bills for something like $8. No kidding. However, the pitch wasn’t factually inaccurate. $2 bills really are the rarest form of US currency in circulation. No argument. They just aren’t all that scarce, and they aren’t worth a penny more than $2.

While not an apples to apples comparison, if one at all, this week, the Bureau of Economic Analysis (BEA) announced the U.S. economy (GDP) grew at a 3.3% annualized rate during the 4th quarter of 2023. This coming on the heels of a whopping 4.9% the previous quarter. To say this was unexpectedly strong would be an understatement.

The median estimate of the 68 prognosticators in the official Bloomberg survey was 2.0%. The standard deviation was 0.28%. As such, the actual number was over 4 ‘sigmas’ to the right of the median, almost 5. That is a massive whiff by the so-called experts. In fact, I haven’t seen such a ‘surprise’ since the weird looking data during the darkest days of the pandemic.

Something had to be unusual in the underlying data, right? I mean, inventory growth must have been bizarrely strong. The trade balance must have seen a massive improvement, or something. These things despite all of the information the government had already given us.

The headline number was pretty good, a little too good.

A breakdown of the numbers didn’t really bear this out. Sure, inventories added a little to the equation, as did the slight improvement in our trade deficit. However, it wasn’t all that much. Further, government purchases were a little stronger than they had been, especially at the state & local level. But, they weren’t that gaudy.

When push comes to shove, the U.S. consumer was stronger than it arguably should have been.

  • Personal Consumption Expenditures (PCE) increased at a very healthy 2.8% pace during the 4th quarter.
  • While far from overheating, ‘gross private fixed investment’ grew at a comfortable 2.1% clip.
  • What’s more, all of the primary segments of C (consumer) and I (investment) were in positive territory.
  • Same goes for residential and commercial real estate, as well as durable goods purchases.

In truth, I had trouble finding dark clouds in all of the report’s silver linings. Shoot, even what they call the GDP Price Index was a miserly 1.5%, suggesting prices are increasing at a much slower rate than originally envisioned.

Don’t get me wrong. I didn’t think the BEA would announce the economy shrank during the last three months of last year. Far from it. In fact, I had been telling folks the number would probably be around 2.4%, or thereabouts. While still way off, I was less wrong than the majority of folks in the Bloomberg survey.

In no uncertain terms, it was almost a perfect report. Solid growth across the board with very manageable inflation? What is not to like? It is/was almost like the good folks at the BEA were fudging the numbers or had somehow miscalculated something.

However, the Federal bureaucracy would never intentionally mislead the general public, would it?

To be sure, I don’t think anyone in Washington would tinker with the GDP report. Even if they were to do so, I can’t imagine they would be so dim as to make as obvious as this. 3.3% when the Street is looking for a 2.0% reading? Almost 5 standard deviations to the right? A nearly perfect report across the board?

If they had really wanted to get to 3.0% nefariously, they could have simply reported some outsized change in inventories, and reversed it over the next couple of quarters. They could have called it a ‘change in the seasonal adjustment factors,’ and no one would have questioned them at all. There would have been no reason to alter the entire report.

Why does my brain work that way?

Regardless, the problem is this: things don’t seem quite as robust as the government is reporting. After all, your eyeballs will often skew your perception of reality, even when forecasting economic growth. So, too, will your past experiences.

How is it GDP suddenly surged in the second half of last year?

  • Hadn’t folks been predicting a recession at the start of 2023?
  • Didn’t a whole bunch of banks fail during the 1st quarter of last year?
  • Hasn’t the money supply (M2) fallen?
  • Aren’t bank deposits down?
  • Isn’t the yield curve inverted?
  • Wasn’t loan growth sluggish last year?
  • Haven’t Leading Economic Indicators been negative for 22 consecutive months, and 23 of the previous 24?
  • The Fed hasn’t cut the overnight rate the way everyone thought it would, right?
  • Isn’t small business optimism well below the 20-year average?
  • Aren’t higher interest rates dampening corporate profitability?
  • Didn’t the trade deficit actually increase about $5 billion last quarter?
  • Didn’t wholesale inventories contract a little? If so, how did they add, positively, to the overall equation?


The list of bricks in the wall of worry is manifold. Indeed. So much so, my first reaction upon reading the GDP report on Wednesday was “that is too good to be true.” Nothing in the first 30-years of my career or in my recent discussions with local business leaders/owners would have suggested anything better than a low to mid 2% observation. Shoot, nothing in my personal life would either, especially after what our insurance company just did to us.

So, what is the story morning glory? If the economy didn’t grow 3.3% last quarter, what did it grow?

The easy bet, the low-hanging fruit if you will, would be the BEA will revise this week’s number down by some amount. The over/under on the revision would probably be around 0.2% or thereabouts. 0.3% at the absolute most. Much more than that would be a de facto admission the methodology is flawed.

That would still mean 4th quarter 2023 GDP was 3-4 standard deviations to the right of the median observation of some of the industry’s better prognosticators. That isn’t impossible. I would hesitate to even call it improbable. Let’s just say it isn’t what one might call normal.

Further, as my time on this Earth has proven to me time and time again, if it seems too good to be true, it probably is.


Have a great weekend.

Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.

John Norris

John Norris

Chief Economist

Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.