Reliably measuring US Q1 GDP growth is, for lack of a better word, hard. For the last few years it has been much weaker than rest of the year, which seems to point to some sort of systematic (but apparently uncorrectable) failing in the process. For example:
- Q1 2016 GDP: +1.5%
The next 3 quarters were all stronger, some noticeably so: +2.3% (Q2), +1.9% (Q3), and 1.8% (Q4).
- Q1 2017 GDP: +1.8%
The next 3 quarters were all stronger as well: +3.0% (Q2), +2.8% (Q3), and 2.3% (Q4)
- Q1 2018 GDP: +2.2%
The next 3 quarters (you guess it…) were sporadically but generally better: +4.2% (Q2), +3.4% (Q3) and +2.2% (Q4)
We have discussed this anomaly with economists both inside and outside the Federal Reserve, and no one has a great explanation for it. Some think it has to do with seasonal adjustment factors. Others point to lumpy government spending. No one has any confidence they know the real answer.
All this is relevant just now because there is a sizeable question mark about the pace of US economic growth and Q1 2019’s GDP report will inform this discussion. The data for 2018 we showed above displays a disturbing cadence: 4% in Q2 2018, 3% in Q3, and 2% in Q1. If the macro effect of the late 2017 tax cuts is really wearing off, what will Q1 2019’s harvest be?
Let’s review 3 useful barometers for Q1 GDP expectations:
#1: Human economists are looking for 1.4% growth just now. These have been coming down all quarter and started the year at 2.1%.
#2: The New York Fed’s quantitative Nowcasting model largely agrees with the economists and has a 1.3% estimate for Q1. Like the economists, the model here started the quarter on a much more optimistic note at 2.1%. Unlike the humans, however, we can isolate why the model has changed with a good deal of arithmetic precision:
- January retail sales were weak, cutting 0.4 points off the estimate.
- Capacity utilization and industrial production in January were similarly soft, shaving a combined 0.6 points from Q1 GDP.
- Since mid-February, the model hasn’t moved around much, however.
#3: The Atlanta Fed’s GDPNow model is somewhat more optimistic at 2.1% for Q1 GDP. Numbers here have been rising since early March, anchored primarily on better housing-related spending. Their model is not as transparent as the NY Fed’s model, however.
The key takeaway from all this: Q1 GDP is likely to reinforce the market narrative about slow growth and reduce fears of inflationary pressures. That supports the current bond market viewpoint of the world and helps anchor long-term interest rates. Equity markets, ever the optimists, will see a lackluster Q1 as a measurement anomaly and history will be on their side with that view.