Source: Bloomberg

Today’s Q1 GDP report was weaker than expected at a 0.7% growth rate. Consumer spending (especially on autos) is subdued, in part because auto lending has generated credit problems that in turn threaten the price structure of the used car market. But consumer investment in homes remains buoyant along with home prices. Real employment costs are rising at 0.8% a year, the highest increase since December 2007.

Meanwhile, the Chicago Purchasing Managers Index came in at 58.7, which means that 58.7% of respondents see business expansion. That’s a very strong number, in fact the strongest since 2014.

The difference between anemic GDP growth and big gains in the diffusion indices may have to do with their composition. The NAPM doesn’t weight respondents by size. More small and medium-sized businesses are expanding on the promise of regulatory and tax relief by the Trump Administration. This doesn’t do much for the big companies who make up most of the economy (and who dominated employment growth during the Obama years).

Expansion by small businesses may have a big effect on diffusion indices (because there are lots of them) but a small effect on GDP at least in the short run, because they are small (and because they play a relative smaller role in the economy than they did a dozen years ago).