Our US Economic Sentiment Indicator (ESI) may have slipped from 6.8% to 6.3% in March, but this was still one of the highest readings in 21 years. This comes in spite of growing fears of a trade war between the US and China, which many suggested would dampen sentiment and economic activity. Some of these fears may yet be reflected in the ESI reading for April, since some survey responses for March will have been submitted before China-specific tariffs were announced on 22 March.
However, fears of a trade war first surfaced in February, when the US announced tariffs on steel and aluminium imports, and there is no sign that this had a material negative effect on business and consumer sentiment last month. Even if a trade war is avoided, as we anticipate, we do not expect such bullish business and consumer sentiment to be maintained indefinitely — hard and soft measures of economic activity are likely to converge later this year.
Given the Q1 data released so far, official GDP growth looks likely to have been 1.5-2.0% (annualized). We have therefore revised down our forecast from 2.6% to 1.7%. However, GDP growth in Q1 has been systematically lower than growth in other quarters since 2000 and we do not think that this marks a slowdown in underlying economic activity; we expect growth to bounce back in Q2.
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