We forecast a 1% GDP growth rate with downside risk for the first quarter of the year, with household consumption expected to be the strongest driver of that growth.
The United States’ gross domestic product grew an estimated 1.5% in January, according to RSM’s Monthly Index of Economic Activity. That bump followed GDP growth of 2.3% in the fourth quarter of 2019.
We forecast a 1% GDP growth rate with downside risk for the first quarter of the year, with household consumption expected to be the strongest driver of that growth. Ongoing production issues at Boeing and the global public health threat posed by the coronavirus disease COVID-19 will likely cast a pall over domestic manufacturing conditions in the auto and aerospace industries. Due to likely supply chain challenges in North and Southeast Asia, we now expect a net drag of -0.2% to -0.3% on growth in the first quarter of 2020. That projection is linked to the COVID-19 virus and the expected -0.5% hit to domestic growth caused by the shutdown of 737 Max production at Boeing.
RSM’s projection of 1% growth for Q1 2020 compares to early forecasts of 2.7% growth from the Federal Reserve Bank of Atlanta and 1.7% growth from the Federal Reserve Bank of New York.
With complete data for December now reported, our model suggests that the underlying economy grew 1.5% in the last three months of 2019. That is quite a bit lower than the 2.3% real GDP growth reported by the Bureau of Economic Analysis, which includes a significant 1.48% contribution by net exports and a half-percentage-point contribution by the government sector.
The outsize contribution of net exports comes from a nearly 9% drop in imports, which is a disturbing indication of a potential drop in consumer spending, and perhaps the unintended consequence of the trade war.
Our lower early estimate comes despite January increases in payrolls and a similar bump-up in hours worked. While the U.S. economy added 225,000 jobs in the first month of the year, that growth was confined to the service sector — where wages are considerably lower than the goods-production sector — and the long-term growth trends in both segments continue to drift lower. We are seriously concerned about the direction of goods-producing and manufacturing hiring in the United States. Quarterly Census of Employment and Wages data show aggregate manufacturing employment is declining, especially in the industrial states of Michigan, Pennsylvania and Wisconsin.
Despite a move above 50 in the January ISM Manufacturing Survey—suggesting growth—hard industrial production data imply the contraction in manufacturing continues. Industrial production declined -0.3% in January and was revised down -0.4% in December. Production of aerospace and miscellaneous production declined by -7.4% in January, almost all of which can be attributed to Boeing’s halting of 737 Max production. We stand by our forecast of a net drag of -0.5% on first quarter GDP due to the ongoing issues at Boeing.
Another area of concern is the quantity of aggregate hours worked by employees in the United States, which has slowed compared to the same time last year, as firms attempt to adjust to uncertainty in aggregate demand. The 13-week average initial jobless claims remained anchored around 218,000, implying firms are not moving to layoffs in response to slower demand. They are, however, reducing hours worked.
Without a doubt, the most important source of strength in the economy is the pace of household consumption. Following January retail sales data, we expect household consumption around 1.8% for the first quarter as the traditional holiday hangover following holiday shopping outlays exerts a powerful downward pull on overall economic activity.
The control group, which the U.S. Bureau of Economic Analysis uses to estimate household consumption, was flat on the month and declined -0.7% on a three-month average annualized pace. Both of these support our forecast of a much more pronounced slowdown in overall economic activity to start 2020.
