The U.S. economic expansion has accelerated since mid-2017. For much of this year it has done so in the face of increasing concerns about monetary and trade policies. For the past two months these two concerns have been playing off each other, producing rising volatility in financial markets. But evidence of spillover to the real economy is scarce and mostly anecdotal. The actual data that drive our model continue to be good, meaning our forecast remains positive.
NIPA Data
The second release of data for the third quarter left estimated real GDP growth unchanged at 3.5%. Final sales growth came in at just 1.2%, down from an already weak 1.4% reading. The primary villain was a large increase in the trade deficit, which reversed an equally large tariff induced decrease in Q2. Outside this anomaly changes were generally encouraging. Growth in consumer spending was reduced from 4.0% to a more sustainable 3.6%. Investment in equipment went from a dismal 0.4% to a more acceptable 3.5%. Business and residential construction both registered declines, but smaller than in the advance data. So lower but still solid consumption, weak but better investment, on top of offsetting (and distorted) trade and inventory swings. Overall, a slightly positive set of revisions to an ambiguous set of data.
Recent Data
The ambiguity in the Q3 data is also present in the monthly data released over the past month.
Sentiment indicators remain upbeat. Consumer confidence fell slightly in November, but is close to a record level. Monthly consumption was strong in October, led by strong auto sales (which continued strong in November).
On the business side both ISM indexes rose in November, and industrial production has been solid. The total index has experienced swings from variation in the utility and mining sectors, but manufacturing has been producing relatively steady gains at close to a 3% rate since mid-2017.
Housing, on the other hand, continues to disappoint. Starts increased in October, but not enough to offset a large drop in September. They remain substantially below the encouraging levels reached during the spring, as do building permits.
Finally, employment data for November were a thoroughly mixed bag. Payrolls disappointed with an increase of just 155 thousand, the lowest since March and well below expectations. The large October increase was revised down from 250 thousand to 237 thousand. In the household survey unemployment remained at 3.7% for the third month in a row. This was accompanied by sufficient labor force growth to produce a steady participation rate. The unemployment rate for African Americans fell to 5.9%, down three ticks and a new all-time low.
Overall, the NIPA data and the monthly numbers are good enough to support a positive outlook, at least for the next few quarters.
Baseline Forecast
As can be seen in the chart, our updated forecast for the current quarter is a little stronger than last month. The difference comes primarily from somewhat stronger estimates for consumption and for investment. The new forecast for 2019:1 is a little weaker than in November due mainly to a negative contribution from inventories. Beyond that our outlook is marginally below last month.
Through mid-2019 we now expect growth to average 3.1%, compared to the 3.3% registered during the past three quarters. A drop in the rate of inventory accumulation more than accounts for that difference. Among components of final demand: consumption, government spending and housing are slightly higher than so far in 2018, while business investment is slightly weaker.
In the labor market the forecast has job creation continuing at above 200 thousand per month through the middle of next year. November data could imply that this is optimistic. We expect unemployment to bottom at just below 3.5% toward the end of next year.
Summary
We are reasonably confident in our forecast for the next few quarters, although we think it may be a little tilted toward optimism. Stated differently we think there are significant risks to the downside and not much upside potential.
This is even more the case beyond the middle of next year. Our forecast has the economy during that period achieving the often hoped for (and seldom realized) soft landing onto sustainable long-term growth (which we think would average a little below 2.5%).
This transition will require business investment to be strong enough to replace part of the inevitable decline in fiscal policy stimulus that is ahead during 2019. Our model says it will, but investment is very hard to forecast.
Stay tuned.