Weekly Update: Q4 Growth Not Bad At All, But Further Slowing Likely in Q1

At long last, BEA released its initial estimate of Q4 real GDP, and the 2.6% print was stronger than expected.  Indeed, that’s a couple of tenths higher than we anticipated in our December forecast, though final private demand growth was somewhat softer. The weak spots were residential investment and nonresidential structures, which both declined. Net exports also took a couple of tenths off real GDP growth. Last week’s housing starts data for December were particularly weak, showing an 11.2% decline. Permits edged up 0.3%,  but permits for single-family units declined 2.2%, pointing to continued weakness in housing. 

The other major categories of GDP posted solid gains in Q4. Business fixed investment grew at a 6.7% pace despite the weakness in structures, as an investment in equipment and intellectual property products was strong.  Consumer spending advanced at a 2.8% pace, a moderation relative to previous quarters but still robust.  However, consumer spending declined sharply in December, pointing to a further slowing in consumer spending growth in Q1. In addition, the initial vehicle sales data for Q1 have shown a decline relative to Q4.  But we still see the fundamentals as solid and expect a return to solid growth in subsequent quarters. As for consumer prices, core PCE prices increased 0.19% in December, and the 12-month change remained at 1.9%. 

Powell’s testimony last week didn’t change our views on the outlook for monetary policy—our baseline continues to be no rate hikes or rate cuts this year. Powell reiterated that, as a result of muted inflation, the  Committee can be “patient” and therefore is in a “wait and see” posture while it looks to see if downside risks are realized. See our commentary for the full analysis. 

Clarida delivered dovish remarks shortly thereafter (Feb. 28). In addition to emphasizing the symmetric nature of the 2% inflation objective and how it is certainly not a ceiling, he argued forcefully that actual inflation  (not forecasted inflation) would be the precondition for further tightening: “Were a model to predict a surge in inflation, a decision for preemptive hikes before the surge is evident in actual data would need to be balanced against the considerable cost of the model being wrong.” He also noted that there “isn’t any real evidence” of cost-push pressure. 

Other policymakers continued to voice their support for the FOMC’s patient stance. Kaplan (Feb. 28) cited sluggish global growth and warned that the 2-year/5-year spread inversion was a “cautionary signal” that should encourage policymakers to be very careful with further tightening. Commenting on the setting of the fund’s rate, he said, “let’s just wait here.” Harker (Feb. 28) saw one hike in 2019 and one hike in 2020 as appropriate. He said he viewed the Fed’s 2% inflation objective as a “medium-term average.” Bostic (Mar. 1)  thought neutral was 3%, but he wanted to take a careful approach toward raising the fund’s rate further toward that level. He favored one hike this year. 

Nowcasts (2018:Q4) 

Source Current
Atlanta Fed GDPNow 0.3%
New York Fed Staff Nowcast 0.9%
CNBC/Moody’s Survey 1.4%

Recent Data

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Housing Starts MoM Dec -11.2% -0.1% 0.4% 3.2%
Building Permits MoM Dec 0.3% -2.6% 4.5% 5.0%
Conf. Board Consumer Confidence Feb 131.4 124.9 121.7 120.2
Advance Goods Trade Balance Dec -$79.5b -$73.6b — -$70.5b
Wholesale Inventories MoM Dec F 1.1% 0.4% — 1.1%
Pending Home Sales MoM Jan 4.6% 1.0% -2.3% -2.2%
Core Capital Goods Orders MoM Dec F -1.0% — — -0.7%
Core Capital Goods Shipments MoM Dec F 0.0% — — 0.5%
GDP Annualized QoQ 4Q A 2.6% 2.2% — 3.4%
Personal Consumption QoQ 4Q A 2.8% 3.0% — 3.5%
Core PCE QoQ 4Q A 1.7% 1.6% — 1.6%
Personal Income MoM Dec 1.0% 0.4% 0.3% 0.2%
Personal Income MoM Jan -0.1% 0.3% 1.0% 
Personal Spending MoM Dec -0.5% -0.3% 0.6% 0.4%
PCE Prices MoM Dec 0.1% 0.0% 0.0% 0.1%
PCE Prices YoY Dec 1.7% 1.7% — 1.8%
Core PCE Prices MoM Dec 0.2% 0.2% 0.2% 0.1%
Core PCE Prices YoY Dec 1.9% 1.9% — 1.9%
ISM Manufacturing Feb 54.2 55.8 — 56.6
U. of Mich. Sentiment Feb F 93.8 95.9 — 95.5
U. of Mich. 5-10 Yr Inflation Feb F 2.3% — — 2.3%
Wards Total Vehicle Sales Feb 16.56m 16.80m — 16.60m

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