US GDP Still Expected To Post Moderate Gain For Q4

Next week’s scheduled release of gross domestic product (GDP) for last year’s fourth quarter will likely be delayed due to the partial government shutdown, but the latest estimates for the indicator still point to a moderate gain. The median estimate for a set of nowcasts compiled by The Capital Spectator reflects a 2.9% increase for Q4 GDP, which is fractionally higher vs. the previous estimate (published on Jan. 15.)

Today’s update continues to show that economic output slowed in the final three months of last year, decelerating from 2018’s Q3’s 3.4% increase and Q2’s strong 4.2% rise. Nonetheless, the current estimate still aligns with a moderate trend that suggests that recession risk remained low at the end of last year.

The obvious caveat is that all the GDP nowcasts for Q4 are missing several data points for December, due to the ongoing partial shutdown of key government agencies. For example, the December reports on retail sales and housing starts have been delayed and so the latest nowcasts don’t reflect those numbers and instead use econometric estimates to fill in the gaps. (Here’s a list of the economic releases that have been delayed so far and the next batch of updates that will likely be postponed.)

The run of missing data points will spill over into next week, including Jan. 30’s scheduled release of Q4 GDP, which will likely remain a mystery until some unknown future date when the Bureau of Economic Analysis reopens.

Meantime, alternative data sets are becoming increasingly valuable for assessing the US macro trend. Yesterday’s PMI survey data, for instance, provided a valuable snapshot of January economic activity. The flash estimate of the US Composite Output Index ticked up to a two-month high, indicating a moderate growth rate that reflects a “solid start” to 2019.

Chris Williamson, chief business economist at HIS Markit, said in a press release that “the rate of expansion is running only slightly weaker than the average seen in the second half of last year.” He explained that “the resilience of the survey data suggests little impact from the government shutdown on the private sector, with very few companies reporting any material detrimental impact on their output or order books.”

But J.P. Morgan economists beg to differ, advising that government shutdown is starting to pinch the economy, despite the relatively upbeat profile for the private sector. CNBC this morning reports:

The economists slashed their first quarter growth estimate to 1.75 percent from 2 percent, citing the shutdown. This is their second quarter point cut to the growth forecast in two weeks.

The Conference Board made a similar point in yesterday’s update of the US Leading Economic Index (LEI), which ticked lower last month. “The US LEI declined slightly in December and the recent moderation in the LEI suggests that the US economic growth rate may slow down this year,” noted Ataman Ozyildirim, director of economic research at The Conference Board. “While the effects of the government shutdown are not yet reflected here, the LEI suggests that the economy could decelerate towards 2% growth by the end of 2019.” (Keep in mind that several of the latest components in LEI were unavailable due to the shutdown, forcing the Conference Board to estimate the missing data points.)

The outlook for slowing growth in 2019 aligns with The Capital Spectator’s projections for the annual pace of GDP changes in the near term. The chart below shows the average forecast for year-over-year changes in output, based on estimates using a diversified mix of nine models.

The bottom line: it’s likely that the Q4 GDP report, whenever it’s released, will reflect a moderate slowdown in growth. As such, there’s still no sign of recession risk for the US in the current GDP nowcasts, which supports a similar point in last week’s business-cycle profile. But the longer the government remains partially shuttered, the macro headwinds will strengthen and the potential rises for negative consequences.

Political risk, in short, comprises an incrementally larger influence for economic analysis with each passing day that Washington fails to solve its political stalemate. Presumably we’ll see economic activity strengthen once the shutdown ends. Meanwhile, there’s a bull market in uncertainty.