Moderately Slower Growth Rate Expected For U.S. GDP In Q4

Summary

• The US expansion remains on track for a moderate deceleration in fourth-quarter GDP growth.
• Despite the risks, it's not yet obvious that a softer macro trend for the US is destined to deteriorate into a new recession in the near term.
• Until the incoming data on multiple fronts dispense a clear warning, it's reasonable to assume that softer-but-still healthy economic growth will endure.

The US expansion remains on track for a moderate deceleration in fourth-quarter GDP growth, based on the median estimate for a set of nowcasts compiled by The Capital Spectator. The good news is that the estimate has been steady in recent weeks.

The median Q4 nowcast remains at 2.7% (seasonally adjusted annual rate), unchanged from the Dec. 18 update and down from Q3's robust 3.4% rise. Nowcasts are prone to all the usual caveats that accompany efforts to anticipate future economic conditions, but the fact that the median estimate has remained stable is an encouraging sign for assuming that the US economy will close out the final quarter of 2018 with a diminished but still-healthy increase in output.

The outlook for this year's first quarter and beyond, by contrast, is subject to greater uncertainty, courtesy of several factors, starting with the partial government shutdown - a shutdown that doesn't appear set to end any time soon. Kevin Hassett, chairman of the White House Council of Economic Advisers, yesterday advised that the shutdown will be a "big negative" on the January employment report. "Our estimate is that GDP in the first quarter could go down by about a tenth if this were to resolve in the next few weeks," he said on Thursday.

The fallout from the shutdown will likely be temporary, but other economic headwinds are blowing, ranging from the Federal Reserve's recent hikes in interest rates to the ongoing fallout from the US-China trade war.

Despite the risks, it's not yet obvious that a softer macro trend for the US is destined to deteriorate into a new recession in the near term. As discussed late last month, the probability that a new NBER-defined contraction has started remains low. Today's revised profile of Q4 GDP activity reaffirms the analysis.

Reviewing the GDP outlook from the perspective of one-year changes also suggests that moderate growth will prevail for the foreseeable future. The chart below shows estimates for annual GDP comparisons, based on the average forecast via nine models. The modeling indicates that the 3.0% annual increase in real GDP in the third quarter will edge down to 2.8% in Q4 and more or less hold at that pace in 2019's first quarter.

At this point it's premature to assume that a new recession is imminent. On the other hand, the evidence is building that US growth has peaked, a theme that's been outlined on these pages for months (see here and here, for example).

Assuming the worst, however, remains an emotional reaction rather than a view based on the data in hand. The year ahead looks challenging, at least by 2018's standards, but the latest numbers have yet to reflect a clear warning for the US macro trend. Indeed, yesterday's December update of the ADP Employment Report still reflects a strong trend for labor-market growth - nonfarm payroll employment surged 271,000 last month, holding at a solid 2.0% year-over-year pace.

Until the incoming data on multiple fronts dispense a clear warning, it's reasonable to assume that softer-but-still healthy economic growth will endure.

"Businesses continue to add aggressively to their payrolls despite the stock market slump and the trade war," notes Mark Zandi, chief economist of Moody's Analytics, which co-produces the ADP numbers on payrolls. "Favorable December weather also helped lift the job market. At the current pace of job growth, low unemployment will get even lower."

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors