Signs point to a U.S. economy that’ll see GDP growth continue to slow. This is the cold water some economists are pouring over Thursday’s better-than-expected fourth-quarter GDP report.
In the fourth quarter, GDP growth decelerated to 2.6%, higher than the 2.2% expected but below the 4.2% and 3.4% seen in the second and third quarters, respectively.
“This is not a bad performance; growth had to slow as the boost from tax cuts faded, though the transition was eased by the plunge in gas prices,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note.
“Q1, however, faces real headwinds,” he added. “Gas prices are no longer falling, the government shutdown likely caused at least some unrecovered hit to consumption, business capex is softening and global growth is weaker.”
With these factors in mind, Shepherdson sees first quarter GDP growth between 1% and 1.5%.
Personal consumption, which the BEA cited as having made a positive contribution to real GDP at the end of the year, is unlikely to hold up as strongly in the first quarter. Namely, lower gas prices at the end of the year supported spending, but these have since rebounded after crude oil prices’ late 2018 rout.
And earlier in 2018, personal consumption grew at a strong 3.8% and 3.5% pace in the second and third quarters, respectively, as tax cuts lifted spending in the spring and summer, Shepherdson noted.
“Absent these forces we expect real spending growth to revert to the rate of increase of real incomes, after tax, which are trending up at an annualized rate of about 2.5%,” Shepherdson said.
Other pundits cited the lapping of the Trump administration’s tax cuts as creating a tough year-over-year comparison for 2019’s first quarter growth. Other macroeconomic concerns also remain part of the mix.
“For the full year [2018], growth was impressive, but the outlook for 2019 is expected to be more muted between fading global prospects, less lift from the tax cut and the cloud surrounding Brexit and U.S.-China trade,” Mark Hamrick, Bankrate.com’s senior economic analyst, wrote in a note.
Business spending
An impending slowdown in business capital expenditures also creates cause for concern in the first quarter.
“This matters, because business capex is the key driver of productivity growth, even in the relatively short term, so a material slowing in the rate of growth of capex means that productivity growth is unlikely to pick up further this year,” Shepherdson said.
“This means, in turn, that any further increase in the rate of growth of wages will be mirrored in full in rising unit labor costs, which are the key input to cost-push inflation models,” he added.
An anticipated slowdown in business spending has been captured in recent economic data that feeds into gross domestic product calculations. Last week, the Commerce Department reported a surprise decline in December’s non-defense capital goods orders excluding aircrafts, which serves as a key forward-looking proxy for business spending. The report led economists like JPMorgan’s Michael Feroli to shave down an early estimate for real annualized GDP growth to 1.5% in the first quarter from 1.75%.
The “swoon in capital goods orders doesn’t bode well for equipment spending, and Jan-Feb rig counts are running decently below the Q4 average, which will be a headwind for capital spending on structures,” Feroli wrote in a note published last week. Spending on structures had also come in weak in the fourth quarter at negative 4.2%, the second consecutive quarter of declines.
Government shutdown
Another major factor impacting the first-quarter GDP report will be the protracted partial government shutdown, many analysts said. Thursday’s fourth-quarter GDP report reflected a mild impact from the government shutdown, which sliced about 0.1 percentage points from quarterly growth, the BEA said in a technical note.
While the shutdown began late in 2018, the bulk of the 35-day shutdown took place in the first weeks of the current quarter. This left hundreds of thousands of federal workers furloughed or working without pay, and caused a plunge in January consumer confidence before a February rebound.
“There’s still some headwinds ahead with the 35-day government shutdown effect still to be seen and tax refunds running about $50 billion less than last year in February,” Chris Rupkey, chief financial economist at MUFG Union Bank, wrote in an email Thursday.
Housing rebound
One area where economists are expecting a resurgence in the first quarter, however, is the housing market. Housing was a drag on growth for the fourth consecutive quarter during the final three months of 2018, but more recent has begun to carve out a different narrative. MBA purchase applications have showed more consumers applying for mortgages amid stabilizing interest rates, NAR data pointed to climbing pending home sales in all major regions and NAHB’s housing market index showed an improvement in builder sentiment.
“With lower interest rates thus far in the first quarter helping to boost early reads on housing activity...at least the housing-related weakness in December (and for the fourth quarter, with residential investment down at an annualized rate of 3% in the GDP report) is likely to be reversed,” David Berson, chief economist at Nationwide, wrote in an email Thursday.
Bright patches aside, a softening in U.S. GDP growth would be consistent with broader global trends of decelerating economic expansion, a trend which is expected to carry over into the next couple years. The International Monetary Fund in January downwardly revised its projections for global economic growth by 0.2 percentage points from its October projections to 3.5%.
