KEY DATA: GDP: 2.6%; Consumption: 2.8%; Business Investment: +6.2%; 2018 (Annual): +2.9%/ Claims: +8,000
IN A NUTSHELL: “Growth is settling down to more normal, sustainable levels as the tax cut impacts fade.”
WHAT IT MEANS: As expected, economic growth came in at a very solid level at the end of last year. Of course, it is slower than the previous two quarters, which every economist outside the White House forecast. The growth rate represents a moderation not a major slowdown, a critical distinction. For all of 2018, GDP expanded at the strongest pace since 2015. Consumers spend solidly on just about everything, with most categories rising solidly. Business investment was decent, though not great. Firms purchased software and equipment and added to inventories, but didn’t build any new structures. The level of inventory building was extremely high and likely the result of tariff fears. That could turn around sharply this or the second quarter, especially if any trade agreement is concluded. Housing, not surprisingly, declined, a trend we could see continue for a while. Meanwhile, the trade deficit continued to widen. Our exports fell, largely because of lower farm sales, but imports rose. Tariff issues likely distorted the numbers. Finally, a surge in defense purchases offset a drop in federal nondefense and state and local government spending. Inflation remained tame, running below 2%.
Job claims jumped last week, but they remain low. MARKETS AND FED POLICY IMPLICATIONS:The slow but steady deceleration in the economy continued in the last quarter of 2018 and we could see an even weaker number for the first quarter. Vehicle demand has softened and coupled with the government shutdown, we are likely to see lower consumer spending in first quarter. There was a huge surge in business software purchases and it is hard to see the excessively large gain repeated. The inventory build looks to be unsustainable and it is not clear what will happen to the trade deficit. I have no idea when or if a trade agreement of any kind will be consummated. So, the best guess right now is that first quarter GDP growth will come in around 2%, give or take a quarter percent. Basically, we are moving back to a sustainable growth pace that we experienced during most of the Obama years. Of course, most people didn’t think that was a good growth rate, but the reality is that is what trend growth looks like.With the tax cut impacts largely done with and Europe and China slowing, it is hard to see how growth can accelerate sharply. That is actually good news. It means inflation is not likely to jump so the Fed can keep on its current path. Of course, given Mr. Powell has more moves than Gayle Sayers had, who knows when the Fed will start rethinking the rethinking it rethought – or whatever. Regardless, rates are going nowhere for a while. As for the equity markets, the one major hope is that a trade agreement will remove the uncertainty overhanging investor thinking. That could provide a short-term boost, but why China and Europe would suddenly buy lots more U.S. product after the initial push occurs is beyond me.