Chairman’s Views

Yellen Reforms and GDPNow Raise US growth optimism

As at 17 August 2023

Author: Gavyn Davies, Executive Chairman

Main Points:

  • In the last edition of this series, we suggested that growth in the global economy might be slowing down, led by weakness in the EU and China. Since then, PMI releases for the advanced economies in July have indicated that service sectors are indeed generally slowing, and the latest hard data releases for China have again been concerning.
  • In the face of this global evidence, however, the US economy has remained rather robust, and the widely watched Atlanta Fed GDPNow has surged to an estimated growth rate of 5.8% (Annualised) in the current quarter.
  • While this greatly exceeds the current “underlying” growth rate in the economy, it certainly does not support the Fed’s latest thinking on the economy. According to the July Federal Open Market Committee (FOMC) minutes, the US economy needs to slow down to further reduce inflationary pressure, and it is expected to do so imminently. This view may need to be amended in a more hawkish direction by Chairman Powell at the Jackson Hole symposium on 24-26 August.
  • In addition, the market has started to focus on Janet Yellen’s extremely optimistic speeches about the impact of supply-side fiscal reforms, which she claims will boost investment in the economy, and improve structural problems in the labour market.
  • GDPNow and the Yellen speeches have added to the narratives supporting higher real bond yields. These narratives are now also impacting equities and the dollar. Although the bond market may be approaching oversold territory in the near term, economic fundamentals appear to support higher yields before this cycle ends. We continue to prefer cash to long duration bonds.

Is US growth accelerating?

The Atlanta Fed’s “GDPNow” estimate for Q3 currently shows growth at about 5.8% for the quarter. Should we pay attention to this number?

Because the Atlanta methodology is based mostly – though not entirely – on hard data as it emerges in a calendar quarter, GDPNow is very erratic at the start of a new quarter. We are still very early in the hard data flow for Q3 so the 5.8% estimate can certainly change a lot from here. But the estimate usually stabilises during the quarter and is watched closely by the market as the quarter progresses. 

The latest upward revisions in GDPNow for Q3 (see Figure1) were mainly driven by releases on retail sales, industrial production and inventories this week. Importantly, real final sales are now shown to be expanding much more rapidly during this quarter than was generally expected by economists.  The Atlanta Fed model thinks that real consumption is rising at an annual rate of 4% this quarter. Further strength in GDPNow is driven by 9% growth in private investment, a figure includes inventories which are finally rebounding very strongly. 

This is likely to result in much better survey data from the goods sector in the US in coming months, and it may help to promote firmer growth in the lagging economies such as China and the EU.


Furthermore, the impact of the Biden administration’s fiscal packages is becoming visible in the economy. There has been an 80% surge in construction investment in factories in the past 12 months, especially in technology areas because of onshoring and climate incentives.

This clearly supports Treasury Secretary Yellen’s repeated claims about a “massive boom” in manufacturing construction that is “touching every corner of the country” and is “uniquely American, not replicated in other countries”. She believes this is the result of the trifecta of measures contained in the Infrastructure Act, the Chips Act and the Inflation Reduction Act, passed by Congress in 2021 and 2022. (See her speech on 14 August.)

It is very difficult to assess the size and timing of the overall boost to GDP growth that will follow from these developments. According to the Wall Street Journal, the total additional government spending from the trifecta is planned to be around $300 billion per annum in the first five years of the programme, which is projected to account for about 1.1% of annual GDP in the early years. Allowing for multiplier effects on private investment and the wider economy, the administration may be hoping that the overall boost to GDP is greater than that figure suggests.

That is a contentious claim. Further work is needed to understand the complicated effects of such a large fiscal injection.

However, there seems to be little dissent from Ms. Yellen’s remarks about a demand-side surge in investment in US manufacturing relative to rest of the world. This has the following important consequences:

  • There is a rising possibility that the much-awaited slowdown in US activity growth may prove to be smaller, or arrive later, than previously expected. We certainly do not think that 5.8% is a central estimate of the underlying growth rate in the economy at the moment, but the underlying rate could possibly be rising from the recently prevailing 2% rate. The Fulcrum nowcast of the underlying growth rate, derived from dynamic factor modeling, has recently risen to a 2.0-2.5% range, similar to the latest Q3 growth projections from the main investment banks (see Figure 2). These estimates offer further strong evidence against an imminent hard landing, thus supporting the “no landing” narrative that has recently been gaining ground in the bond market.
  • Secretary Yellen argues that the administration’s collection of fiscal stimulus measures are based on “new supply side” economics, and she sounds hopeful that the plan will boost US productivity growth in future, adding to any boost that may stem from the introduction of AI. Others are much more sceptical about these claims, arguing that higher investment that is based mainly on government subsidies will tend to be wasteful, leading to a reduction in capital productivity (see the Wall Street Journal leading article here). We tend towards an optimistic view on these questions, in which case higher productivity growth and a rise in long-term real equilibrium interest rates (r*) would be indicated.
  • Both firmer US activity growth, and a rise in r*, would tend to keep US policy rates higher for longer, at least compared to current market pricing, which shows a decline of almost 100 basis points in policy rates next year. Chairman Powell may warn next week that policy rates could remain at or above current levels for longer than the market implies.


Although there was a great deal of focus on the immediate injection of fiscal support during the pandemic, especially the mailing of stimulus checks directly to households, the markets may not yet have fully recognized that the trifecta of fiscal policy reforms in 2021/22 could represent a significant supply and demand shock to the US economy. Much of the impact will prove very beneficial for US economic performance relative to other advanced economies, though there could be offsetting effects via increased inflation and higher interest rates for a while.  

Secretary Yellen does not often make outlandish claims which are quickly invalidated by the data. She is emphasizing very strongly that “new supply side economics” is driving the strength in manufacturing investment and the labour market. There is probably some political hype here, but the markets will be paying a lot more attention to this emerging story in coming months.

Figure 1

Source: Federal Reserve Bank of Atlanta

Figure 2

Source: Fulcrum Asset Management, Federal Reserve Bank of Atlanta, JP Morgan, Goldman Sachs

About the Author

Gavyn Davies

Gavyn Davies is Chairman and co-founder of Fulcrum Asset Management. Prior to Fulcrum, Gavyn was as an Economic Policy Adviser to the British Prime Minister (1976-1979) and a member of H.M.Treasury Independent Forecasting Panel (1992-1997). He was the Head of the Global Economics Department at Goldman Sachs from 1987-2001 and Chairman of the BBC from 2001-2004. Gavyn graduated in Economics from Cambridge followed by two years of research at Oxford and he is also a visiting fellow at Balliol College, Oxford.

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