KEY DATA: GDP: 2.2% (from 2.6%); Annual: 2.9%/ Pending Sales: -1%; Over-Year: -4.9%/ Claims: -5,000

IN A NUTSHELL:  “We’re back to trend growth, which really should not surprise anyone.”

WHAT IT MEANS:  The economy expanded solidly last year, but we could be looking at the end of near-3% growth.  Fourth quarter growth came in less than previously calculated, as just about every component was revised downward.  The only positive revision was a narrowing of the trade deficit. But it is looking like the slowdown that followed the 2015 surge may be nearly matched this year.  After peaking in the spring, we have had two consecutive quarters of decelerating growth and it is likely that we started off 2019 on an even slower note.  The tax cuts helped power growth last year, but the positive effects looks like they lasted for a much shorter time than most economists expected.  I thought we would get a more moderate slowdown and it wouldn’t be until this spring that trend growth would be hit.  We are there now.

One segment of the economy that faltered last year was housing and that weakness has been continued into this year.  The National Association of Realtors Pending Home Sales Index, which measures signed contracts not closings, fell again in February.  The level seems to be stabilizing, but not at nearly the pace we saw before 2018 or even at the 2018 level.  Undoubtedly, the limited supply is affecting sales rates, but we have complained about that for several years now, so don’t expect it to change soon. 

Jobless claims fell last week and are now back near historically low levels.  The craziness of the winter weather and government shutdown may have finally washed out of the numbers. 

MARKETS AND FED POLICY IMPLICATIONS: There really is no difference between 2.9% and 3%, given the margin of error in the estimates, so don’t go using this number for any reason other than to say that growth was solid last year.  Still, you can only expand so fast and with labor market growth limited and productivity weak, it was only a matter of time before we got back to trend growth.  The fourth quarter 2.2% number is pretty much at trend.  Investors and the Fed members need to get their heads around that likelihood.Comment on yesterday’s January trade report:  The monthly trade deficit narrowed sharply in January and there are several explanations for that shrinkage.  Some say it was due to the tariffs, as imports from China fell sharply.  That is one likely reason, though I think it was due to something else related to tariffs: Hopes that a traded agreement would be concluded and the tariffs lifted.  That would have led importers to wait before landing their products in the U.S.  That way, their goods would not be subject to tariffs.  I expect imports from China to rise as we go through the next few months as the timing of a possible deal has become more uncertain.  Of course, if it were mostly due to the weakening growth, that would be something to worry about.