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 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.