Monday, 22 of April of 2019

Economics. Explained.  

GDP, Inflation, and Interest Rate Forecasts

April 19, 2019

The final estimate of GDP growth in the fourth quarter was 2.2% compared to an earlier estimate of 2.6% in the fourth quarter.  GDP registered  3.4%growth  in the third quarter.  The stock market selloff in that quarter and the first few days of the government shutdown did not have a significant impact on growth in that quarter.  However, we expect a bigger impact from the stock market selloff and government shutdown in Q1 where we anticipate GDP growth of 1.9%.  But with the stock market having recovered most of its fourth quarter drop and the government shutdown now over, we expect a growth rebound in the second quarter to 2.9%.  For the year as a whole we anticipate 2.7% GDP growth after having risen 3.0% in 2018.

Consumer spending rose 2.8% in the fourth quarter despite the stock market selloff.   After a moderate drop in consumer confidence during the stock debacle, confidence has rebounded sharply.  Stock prices have rebounded and are now within 1.0% of their previous high level..  The gains in employment are generating income which gives consumers the ability to spend.  Consumer debt is very low in relation to income.  Interest rates  should be steady through the end of this year.  For 2019 we anticipate growth in consumer spending of 2.5%.

Investment spending rebounded and climbed 5.4% in the fourth quarter after having taken a bit of a breather with a 2.5% growth rate in the third quarter..  Investment spending was essentially unchanged for 2014-2016.  It appears that the corporate tax cuts, repatriation of earnings at a favorable tax rate, and a reduction in the regulatory burden are giving business leaders confidence to open their wallets and spend on new equipment and technology.  Not only will this boost GDP growth in the short term, if investment continues to climb it will boost productivity growth which will, in turn, raise the economic speed limit from about 1.8% previously to 2.8% or so by the end of this decade.

The trade gap widened by $6.0 billion in the fourth quarter to $955.7 billion  after having widened by $108.7 billion in the third quarter.  This means that the trade component had no impact on  GDP growth in the fourth quarter and subtracted 0.2% from the GDP growth rate for last year.  We expect trade to add about 0.2% to GDP growth in 2019.

Non-farm inventories climbed by $96.8 billion in the fourth quarter after having risen $89.8 billion in the third quarter. Going forward we expect inventories to climb by about $70 billion per quarter.

Expect GDP growth of 2.7% in 2019 versus 3.0% last year.

The inflation rate should be fairly steady in 2019.  There is a shortage of available homes and apartments in the housing sector which is raising rents.  That will put upward pressure on the inflation rate.  However, the pickup in inflation will be limited as internet price shopping will keep goods prices steady in 2019.  At the same time, rising productivity growth will offset much of the increase in wages.  As a result, we expect the core CPI to be steady at  2.2% in 2019.

With GDP growth at 2.7% and inflation steady at 2.2%, the Fed will leave rates unchanged at 2.4% through the end of the year.

With no further increase in the funds rate this year and inflation steady at 2.2%, long-term interest rates should rise slightly in 2019 with the 10-year climbing from  2.5% currently to 2.75% by the end of this year.  Mortgage rates should edge upwards from 4.0% currently to 4.5% by the end of 2019.

Stephen Slifer

NumberNomics

Charleston, SC

 


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