The U.S. economic expansion has clearly lost some momentum, not unexpected for an economy close to potential and full employment. The question at this point is how much deceleration there will be when things settle out. Pessimists expect a return to the “new normal” standard of 2% growth. We are more optimistic and see growth settling in the mid-2% range.
NIPA Data
The third release of data for the fourth quarter put real output growth at 2.2%, down by a significant 0.4% from the initial report a month earlier. The main source of the negative revision was a large decrease in the estimate of goods consumption (from growth of 3.8% to just 2.6%). There were also downward revisions to intellectual property investment, residential investment, and government spending, partly offset by a smaller estimate of the trade deficit. While these revisions can in no way be seen as good news, two factors should temper any impulse to abandon all hope. First, the data collection process was probably distorted by the government shutdown. Second, even if the data is accurate some aspects could easily prove to be transitory. In particular, the shutdown probably affected government spending, and weather could have had a role in the negative growth numbers for construction activity.
Recent Data
Monthly data continue to be affected by the shutdown and have been mixed. Data on real income and consumption are still a month behind their usual schedule. The most recent numbers (for January) show a decline in disposable income (but following a large December increase) and a small increase in real consumption (following a decrease the month before). Data for housing are up to date with February housing starts falling back after a good January report. There is no sign that the sector is breaking out of its funk. Industrial production rose slightly in February, but all of the increase came from utilities and mining. The IP data for manufacturing continued to disappoint.
Data released in the past two weeks, covering March, are somewhat more encouraging. The Conference Board consumer confidence measures were down slightly following a jump in February. Consumer sentiment is essentially flat so far this year. The same applies to business sentiment. ISM’s manufacturing index rose slightly in March, while their non-manufacturing measure was off a little. Both remain well into expansion territory.
Finally, the employment report for March, out last Friday, was mostly positive. Payroll employment increased 196 thousand, plus another 14 thousand in positive revisions to January and February. For the first quarter the average monthly increase is a solid 180 thousand. Most of the job creation was in services, with substantial increases in the professional and business, health care and leisure categories. Goods production added only 12 thousand in March and is averaging just 21 thousand per month so far in 2019. Manufacturing lost 6 thousand jobs last month and is barely positive for the year to date. Like the establishment survey the household survey had a good top line and some troublesome details. It had the unemployment rate holding steady a 3.8% -- the level we view as “full employment.” This was assisted, however, by a decrease in the labor force participation by two ticks to 63.0%. [Other things being equal, a decline in participation will produce a lower unemployment rate.] The labor force has fallen by 269 thousand over the past two months.
Overall, the monthly data have about an equal mix of positives and negatives, with the former more prevalent recently.
Baseline Forecast
As can be seen in the chart, our updated forecast for 2019 is very slightly below that of last month. We now expect GDP growth for the year to be 2.5%, which would be 0.5% below that for 2018.
The primary source of the deceleration is slower growth in business investment. We now put it at 4.2% for the year, almost 3% below last year. This could prove to be a pessimistic forecast. On the other hand, our model forecasts growth for consumption to match last year and for housing to improve, both potentially optimistic expectations.
Summary
Our reading of the recent data is that the economy has downshifted from its stimulus induced 3%+ growth during the middle of 2018, but not to the extent suggested by the revised Q4 GDP numbers or by some of the weak monthly data from December and January. We think our 2.5% forecast, which about matches our estimate of potential, is a good baseline, with about equal probabilities of negative and positive deviations.