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Expect fourth quarter GDP to come in at 1.7%

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The end of the year in economic data was somewhat disappointing.

Following Wednesday morning’s trade, retail and wholesale inventory, there is significant downside risk to the consensus forecast of 2.1% GDP growth. While we are keeping our below-consensus forecast of 1.7%, our tracking model suggests risks of a print below 1.5%.

Late in business cycles, the Bureau of Economic Analysis tends to overestimate growth its its first estimate and then tends to revise growth prints down over the next two estimates. This the primary reason why we are keeping our below-consensus forecast.

The primary reason behind the downward revision is the sharp widening of the trade deficit to -$68.3 billion caused by a decline in auto exports and a large increase in merchandise imports. Inventory accumulation for December points to declines in the wholesale category and the retail sector, as well as to downward revision to the November number in the retail ecosystem.
As is often the case, the swing factor in first GDP prints is located in the inventory and spending categories. Our forecast for real consumption stands at 1.5%; thus our view that there is significant downside risk around investor and market expectations of growth to close out 2019.

The end of the year in economic data was somewhat disappointing as the looming impact of the slowdown in production linked to Boeing’s suspension of 737 Max production, somewhat softer consumer demand and the lagging uncertainty around the trade war all contributed to a moderately slower pace of growth to end 2019.

While the pace of growth slowed over the past 12 months, we do not see a material case for a Fed rate cut at this time. Despite the pricing in by the market of a 25 basis point cut by October 2020, we maintain our call for no rate cut in 2020.

A downward revision

Recent data about retail sales and utilities demand in the December industrial production report caused us to revise down our GDP forecast to 1.7%, with real consumption arriving near 1.5% during the final 90 days of the year.

We think that distortions around real consumption, along with the traditional inventory clearing around the end of the year, will be the major swing factors in the growth estimate by the Bureau of Economic Analysis. In our estimation the risk to our forecast is to the downside linked to the December economic data.

One of the two bright spots in the quarterly report is likely to be the trade data, which will show a noticeable narrowing in the deficit, mostly because of policy-linked disruptions. While that is a positive in the report, investors should anticipate a reversal of those gains during the first quarter of the year. The other bright spot in the data will be residential investment, which we expect to increase near 4.5% on a seasonally adjusted annualized pace.

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About Joseph Brusuelas

@JoeBrusuelas

Joe Brusuelas, “chief economist to the middle market,” is the preeminent voice championing issues and policies facing midsize companies in the United States and around the world. An award-winning economist, Brusuelas has more than 20 years’ experience analyzing U.S. monetary policy, labor markets, fiscal policy, international finance, economic indicators and the condition of the U.S. consumer.

A member of the Wall Street Journal’s forecasting panel and the UCLA Anderson School of Management's Board of Directors, Brusuelas regularly briefs members of Congress and other senior officials regarding the impacts of federal policy on the middle market and the factors by which middle market executives make business decisions. He also frequently offers his insights on the U.S., Canadian and global economies in the financial media. In 2020, he was named one of the 100 most influential economists by Richtopia. In December 2023, Brusuelas and the economics team were recognized on Bloomberg's list of Best Bond Forecasters after correctly predicting where the benchmark Treasury would end the year.

Before joining RSM in 2014, Brusuelas spent four years as a senior economist at Bloomberg L.P. and the Bloomberg Briefs newsletter group, where he co-founded the award-winning Bloomberg Economic Brief. Earlier in his career, he was a director at Moody's Analytics covering the U.S. and global economies for the Dismal Scientist website. He also served as chief economist at Merk Investments L.L.C. and chief U.S. economist at IDEAglobal.

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