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U.S. GDP Growth Hits a Soft Patch--Not Quicksand


- U.S. growth is poised to slow down this year to 2.2%, from 2.9% in 2018 (versus the 2.2% average for the current expansion), reflecting weaker private nonresidential investment spending growth. Our overall odds of a recession (12-months out) remain at the 20%-25% range set in February, though we recognize that recent financial market turmoil adds headwinds to this assessment.

- Investor confidence has worsened amid headwinds from slower global growth, trade tensions, and a moderation in fiscal stimulus, with markets pricing in a rate cut by December 2019. The household sector, which accounts for two-thirds of overall economic output, remains healthy, supporting a still-solid domestic economy.

- The U.S.-China trade negotiations have reportedly improved, with President Trump holding off on imposing higher tariffs on March 1. But an abatement of the trade disputes isn't a game changer for our growth outlook.

- While we currently expect no rate hikes this year, if the recent weakness is only a soft patch and not quicksand, the Fed may surprise markets and decide to sharpen its monetary tools later this year, with a rate hike just in time for the holidays.

Apr. 04 2019 — Was the 4.2% annualized GDP growth in the second quarter of last year as good as it gets for the U.S. economy? The data since then--particularly the disappointing December and January data--suggest so. Fourth-quarter growth was revised to 2.2% in the final figures from the Bureau of Economic Analysis (BEA) , after the disappointing December trade and construction reports.

Even worse, we believe growth in the world's biggest economy likely slowed dramatically in the first three months of this year, to just 0.8%--exacerbated by the federal government shutdown.

So, is this slowdown a soft patch--or quicksand?

We suspect the former. Economic data has begun to warm from the winter chill, with this expansion, at 118 months, likely to reach the record length of 121 months in July. A solid domestic economy supporting a healthy jobs market with higher wages is helping to propel an expansion that will become the longest ever if it continues until July. However, as the fiscal stimulus from the tax package and the Bipartisan Budget Agreement wane just as the cumulative effects of tighter monetary policy take hold, growth will almost surely slow. Trade disputes and government dysfunction in the U.S. and abroad, which the recent federal government shutdown demonstrated, will exacerbate this deceleration.

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