The unexpected drop in retail sales in December has raised uncertainty about the upcoming report on fourth-quarter gross domestic product (GDP). Prior to yesterday’s update on consumer spending for the final month of 2018 most estimates of the Q4 economic activity reflected moderate growth in the mid-to-high 2% range. But the St. Louis Fed’s GDPNow model slashed the Q4 outlook to a sluggish 1.5% after the release of retail sales data. That GDP estimate is an outlier on the downside at the moment. The question is whether nowcasts from other sources will fall in the days ahead as the latest retail data factors into the calculus?
For some perspective, let’s start by rounding up the current GDP estimates. As the chart below shows, the current median for a set of nowcasts compiled by The Capital Spectator fell to 2.4% for Q4 GDP growth – down from 2.9% in the Jan. 25 update. The main source of the downside revision is due to hefty fall in the GDPNow data, which was cut yesterday to 1.5% from 2.7% previously.
It’s premature to assume that one weak nowcast is the last word on the upcoming Q4 GDP report, which the Bureau of Economic Analysis has rescheduled for release on Feb. 28 (the data was originally scheduled for Jan. 30 but was postponed due to the government shutdown). At the same time, yesterday’s sharp drop in retail spending for December can’t be ignored.
Consumption in the retail sector fell 1.2% in the final month of last year – the biggest monthly slide in more than nine years. The tumble cut the year-over-year trend to a sluggish gain of 2.3% — a 2-1/2 year low.
Some analysts say the weakness in spending may reflect a temporary glitch due to complications in data gathering related to the government shutdown that ended late last month. Perhaps, but even if the report is accurate it’s too early to assume the worst. Indeed, the January update on payrolls was unusually strong, suggesting that retail spending may bounce back.
In any case, it’s been clear for some time that US economic growth has been slowing after peaking in last year’s second quarter, when GDP rose a sizzling 4.2%. Recent estimates of the macro trend published in the US Business Cycle Risk Report (US-BCRR) point to a continuation of the growth slowdown in this year’s first quarter. The Feb. 11 edition advised that the revised estimates of two business-cycle benchmarks – Economic Trend Index (ETI) and Economic Momentum Index (EMI) – revealed further weakening in economic activity through next month (see chart below, which was originally published in US-BCRR). The projections show that these benchmarks look set to reflect the softest run of growth in several years (for a longer-term chart of ETI and EMI, see this post).
It’s important to recognize at this stage that slower economic growth doesn’t automatically lead to a new recession in the near term. While it’s impossible to rule out the possibility that the US will succumb to contraction later in the year, for the moment there’s precious little hard data that shows that recession is a high-probability event for the immediate future.
That could change in the weeks ahead, of course, depending on how the incoming numbers compare. But for now, it’s speculative to assume that softer growth will quickly lead to an economic slump. History, after all, reminds that economic soft patches sometimes give way to re-acceleration.
With that in mind, the next round of economic releases deserve close attention, including today’s update on industrial production for January. More importantly, stay tuned for the delayed update on personal income and spending for December that’s set for release on Mar. 1. The burning question: does the broader read on consumer activity in this report confirm the weak data in yesterday’s retail figures?
For now, it’s still prudent to assume that the deceleration in GDP growth will be mild for the near term. Based on a set of combination forecasts, The Capital Spectator’s outlook for the one-year trend in output is on track to ease this year, but not enough to ring the recession alarm bells… at least not yet.
The bottom line: it’s almost always misguided to let one data point change the outlook and so the weak retail sales report for December should be viewed cautiously at this stage. A new recession may be brewing, but it’s too early to rule out the possibility that the economy will reaccelerate (or stabilize) later in the year.
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