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U.S. economic data are indicative of a somewhat nuanced U.S. economy.



May 2019 U.S. Economic Outlook

May 6, 2019
By Robert A. Dye, Ph.D., Daniel Sanabria

It’s Complicated...

    U.S. economic data are indicative of a somewhat nuanced U.S. economy. GDP growth in the first quarter of 2019 was much stronger than we anticipated, however, some of the underlying data was weak. April job growth was also stronger than expected, yet two major indexes capturing much of the U.S. economy declined in April.

    Real GDP increased at a 3.2 percent annualized rate in Q1. Three out of the last four quarters have posted real GDP growth above 3.0 percent, buoyed by the tax reform of early 2018. When we look at the components of Q1 GDP, the message is more complicated. Several important components of GDP were weak in Q1. Real consumer spending was soft, increasing at a 1.2 percent annualized rate, well below the 3.3 percent average of the previous three quarters. Real business fixed investment (excluding inventories) increased at a modest 2.7 percent annualized rate, the second weakest expansion in that category over the last nine quarters. Real residential investment continued to slide, contracting at a 2.8 percent annualized rate. Residential investment has declined for five consecutive quarters. Real federal government spending, which was very strong from 2017Q4 through 2018Q3, was unchanged in 2019Q1.

    The components that pushed headline Q1 GDP stronger than expected in Q1 all showed unsustainable growth. The U.S. international trade gap narrowed considerably in Q1, adding just over 1 percentage point to headline real GDP growth. Trade flows have been very lumpy recently as companies schedule shipments with one eye on the timing of new tariffs. Even with an unratified trade deal in place for Canada and Mexico, and a U.S.-China trade deal imminent, U.S. trade faces the twin headwinds of a strong dollar and a softer global economy. We expect the trade gap to revert to being a small drag on U.S. GDP very soon. Inventory accumulation added about 0.7 percentage points to headline real GDP growth in Q1. Inventories have been building up strongly over the last three quarters. Boeing’s recent problems have added to inventory accumulation. Automakers are also building their inventories in anticipation of a potential contract dispute with the UAW later this year. We expect inventory accumulation to flip from a positive for GDP back to a negative soon. Finally, real state and local government spending was unusually strong in Q1, increasing at an unsustainable 3.9 percent annualized rate.

    Most labor-related data looks strong after payroll job growth faltered in February. U.S. payrolls increased by just 56,000 net new jobs in February, the weakest monthly gain since September 2017. March payrolls bounced back, showing a solid 189,000 job gain. April payrolls surged, up 263,000, while the unemployment rate fell to 3.6 percent, the lowest rate since December 1969.
    Both the ISM Manufacturing Index and the ISM Non-Manufacturing Index declined in April and have been on a declining trend since late 2018. Fortunately, both indexes remained above 50 in April, indicating improving conditions. However, the pace of improvement for these broad-reaching indexes has clearly cooled.

    Separating the transitory from the fundamental is a key challenge in this complex economic environment. Adding to the complexity is the challenge facing the Federal Reserve. How the Fed executes monetary policy and how it thinks about inflation are both in question by monetary policy theorists. Inflation has been cooler than expected. The core-PCE price index showed a 1.6 percent year-over-year gain in March, and has been running below the Fed’s 2 percent target since last August. We still expect the fed to keep the fed funds rate range unchanged at 2.25-2.50 percent through the remainder of this year.

For a PDF version of this report, click here: May 2019 U.S. Economic Outlook

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