April 19, 2019

News in Charts: Positive US GDP surprise expected amid pickup in economic sentiment

by Fathom Consulting.

We have revised higher our forecast for US Q1 GDP growth, from an annualised rate of 2.0% to 2.8% (the consensus estimate from the Thomson Reuters Poll is 1.8%) following the release of some positive hard economic data over the last few weeks. Those data include retail sales, which rebounded in March, solid US housing data and a quicker-than-expected increase in exports in the first two months of this year.

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Our revision coincides with an upturn in business and consumer confidence and is reflected by our US Economic Sentiment Indicator (US ESI), which climbed from 3.9% to 4.2% in the last month of Q1. The increase in the US ESI was led by the consumer sector, with 7 out of 9 consumer-based inputs rising, compared with just 8 out of 14 business-based inputs. The dovish-sounding Fed, a solid labour market and further gains in the stock market can help explain the move.

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Curiously, this is somewhat at odds with what we expect to see in next week’s advance estimate of US Q1 GDP, which is likely to show a soft consumer spending print, but with solid contributions to growth from business investment, trade and inventories. The decline in spending was mainly due to soggy auto sales, which may be transitory and linked to the government shutdown.

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The bigger picture is that while US GDP growth looks set to slow this year, we still think it will grow above potential, causing inflation to rise and prompting another increase in the fed funds rate in H2 this year. The NFIB survey of small businesses offers a window into the slower-growth-but-rising-inflationary-pressures dynamic: the number of firms expecting an improving economy has fallen significantly, while the number of firms that are finding it hard to fill one or more positions is close to its all-time high.

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