Will the Economic Slowdown Persist?

The most important economic data this week should be the Q418 Real GDP report on Thursday.   A print like the Atlanta Fed model's 1.4% projection would boost expectations of a slowdown ahead in economic growth.   Even a consensus-like print of 2.4% could support these expectations if the composition shows inventory investment close to the high level of Q318.  But, the real question is whether the weakness seen in some December data resulted from temporary factors, such as the government shutdown, and will reverse during H119.

Some weak spots continued in January.  In particular, the motor vehicle sector pulled back production sharply as sales fell.  It probably contributed to the run-up in Unemployment Claims in late January and early February, as well as to the declines posted by some manufacturing surveys so far in February.  The risk, at this point, is for a decline in the February Mfg ISM, due Friday.  Consensus looks for a decline to 55.9 from 56.6.

This weakness, however, may not persist.  The drop in Initial Claims in the latest week raises the possibility that the worst is over.   At 216k, Initial is back to being under the Q418 average (219k).   It is too soon to say whether they will stay low.  But, if they do as we move into March, a bounce-back in Q219 Real GDP Growth will become more conceivable.  

                                            Unemployment Claims
                         Initial (000s)                        Continuing (Mn)
                       2019        2018                       2019       2018
     Q4             219          238                         1.63        1.91            
     Jan             220         234                          1.71        1.95
     Feb            230         221                          1.75        1.91

    latest wk     216                                         1.73   

A speedup in economic growth could be accompanied by a pickup in inflation.  Commodity prices already have come off their recent lows.  If the US and China strike a trade deal that eliminates last year's tariffs, the dollar is likely to fall.  This should put further upward pressure on commodity prices as well as lift import prices (particularly those that were not subject to the tariffs).   And, wage inflation could pick up, a risk highlighted by NY Fed President Williams in his speech on Friday.  Calendar considerations point to a high 0.3% m/m increase in February Average Hourly Earnings, due March 8.