US: A firehose of data and a mixed bag, but mostly on track.

Dan North
Dan North North American Chief Economist

Q4 GDP rose 2.6% q/q annualized, beating expectations of around 2.2%. GDP for all of 2018 rose 2.9%, tying with 2015 for the highest of the nine year recovery.  Consumption was slightly disappointing, but nonetheless grew 2.8%. Net exports were the only negative component, subtracting -0.2% from the headline while government spending added +0.1%. Investment increased +4.6%, and once again it was driven by business investment which grew +6.2%, while nonresidential investment fell -3.5%, the fourth consecutive quarterly loss, and the sixth of the past seven. On a y/y basis non-residential investment is growing at a hot +7.2% whereas residential investment is falling -3.0%, the worst in almost eight years. The Fed’s favored inflation gauge, the core PCE deflator, is running at 1.9% y/y, after 2.0% in Q3 and 1.9% in Q2.  In other words it’s very stable right next to the Fed’s 2% target.

More granular monthly data on spending is a bit suspicious looking and leads us to think that the Q4 could be revised up. The monthly data shows that spending actually fell -0.6% in December, the worst in over nine years, the worst of the recovery. The loss drove the y/y rate down to 2.2% from 3.1% in August. It just seems unlikely.  We saw the same issue in the December retail sales report – it was almost too bad to believe. So it’s good news in the sense that if we are right and spending is revised up, it will show an even stronger economy in Q4 and December.

It’s important to realize that this data was delayed by the government shutdown, so the “backward-looking” perspective of the GDP report is more exaggerated than usual. In other words, it tells us what happened three to five months ago. Let’s look at some fresher information, starting with the positives to go along with the GDP report.

February Consumer Confidence rose by a sharp +9.7 points. The increase was driven by a +14 point leap in future expectations, the biggest gain in over seven years. Consumers evidently felt relief from the end of the government shutdown, a rising stock market, and trade hopes. But a huge divergence remains between consumers’ assessments of the current situation and future expectations.  The difference, as shown in the chart with recessions marked, is at levels that in the past have been associated with recessions, and while it’s not a perfect indicator, it is worrisome.

In other good news, Fed Chair Powell gave his semi-annual testimony to Congress this week and was careful not to make any surprise moves, reiterating the “patient” approach to changing interest rates. And President Trump extended the March 1st deadline to impose tariffs on $200 B of Chinese imports, because there appeared to be substantive progress in negotiations with the Chinese on trade issues.  (A recent report highlights the importance of intellectual property theft in the negotiations. Click here to read it.)

There has been some more negative news as well.

On the manufacturing side of the economy, new orders for durable goods rose +1.2% m/m in December, but losses in previous months drove the y/y rate down to +3.4% from +12.1% just four months ago. After stripping our volatile components, core orders, a proxy for business investment, fell -1.0% m/m, the fourth loss in five months, pushing the y/y rate down to +2.0% from +8.8% five months ago. Similar the Institute of Supply Management’s (ISM) manufacturing index fell from 56.6 to 54.2, the lowest level since November of 2016, over two years ago. The employment component also fell to the lowest since November 2016.  Overall, six of the ten components fell, including a 2.7 point drop in new orders and a 5.7 point fall in production. 

As noted in the GDP report, the housing market is in sickly condition. Existing home sales fell -1.2% m/m in January to the lowest level in over three years. It was the third consecutive loss, and the 15th in 20 months. The y/y rate fell to -8.5%. New home sales are down -7.7% y/y. Housing starts fell a sharp -11.2% m/m in December resulting in a -10.9% y/y decline. Permits rose a scant +0.3% m/m to only +0.5% y/y. 

That’s a lot of data in one week.  The bottom line is the economy was stronger than we thought in Q4, and there’s a chance it could be revised to even stronger. Consumer confidence made a sharp rebound, and Powell and Trump did the right things. But manufacturing and housing remain sore spots.  We maintain our 2019 GDP forecast of 2.5%, although at the moment it looks like Q1 could be quite weak.

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