Evidence on Persistence of an Economic Slowdown -- a Fed Response?

This week's US economic data will shed light on the extent to which the sharp weakness seen at the turn of the year was short-lived.  Consensus is not optimistic, as it does not see much strength in the "spending" data for early Q119.  In particular, it does not see full bounce-backs in Retail Sales or Industrial Production/Mfg Output. 

                                                                              (m/m percent change)
                                                              Consensus Estimate                
                                                              for January *                         December
      Retail Sales                                          -0.1                                         -1.2                                         
      Ex Auto Sales                                        0.3                                        -1.8
      Durable Goods Orders                         -0.7                                          1.2                      
      Ex Transportation
      Durable Goods Orders                          0.2                                           0.1
      New Home Sales                                  0.5                                           3.7
      Industrial Production                            0.4                                          -0.6
      Mfg Output                                           0.4                                          -0.9

*  Industrial Production and Mfg Output are for February.

Consensus-like prints will probably keep Street estimates of Q119 Real GDP Growth low, including the Atlanta Fed model's early projection of +0.5% (q/q, saar).  To some extent, a slow pace for Q119 Real GDP could result from the "ramp" effect of coming off a weak ending of the prior quarter.  The weak starting point holds down the quarterly average, masking the extent of recovery during the quarter.  In this case, the recovery over the quarter would set up for a sharp speedup in q/q GDP Growth in Q219.  If the recovery during Q119 is modest, however, as suggested by this week's consensus estimates, then the risk is for further sluggish q/q growth in Q219.

At this point, the Atlanta Fed model's +0.5% projection appears too weak relative to hours worked.  Total Hours Worked are up 0.8-1.3% (q/q, saar) so far in Q119.  Of course, the bad winter weather could have depressed Productivity, offsetting the strength of THW in terms of their implication for Q119 GDP.  But, the risk in this case would be that the weather drag is temporary.  It would be followed by a pickup in economic growth as the weather improved into Q219.

Nonetheless, consensus-like prints this week -- including a benign 0.2% m/m February Core CPI -- (and a further decline in stocks) could elicit a Fed response at the March 19-20 FOMC Meeting.  Specifically, the Fed could announce that it is starting to cut back sales of longer-term assets from its balance sheet.  Although the announcement effect of a smaller-than-expected amount of sales already is in the markets, Fed minutes had suggested implementation would begin later in the year.  By bringing the starting date ahead, the present value of the announced amount of sales curtailment would be higher than before and thus be a positive for longer-term Treasuries and stocks.