GDP Looking Up, Government Shutdown Looks Down
I’ve been in banking, finance, and international accounting for 20 years plus. The economy is slowing down due to political tension, plus outside world economic slowdown is coming to US shores. The tariffs and trade wars are showing up in the GDP number now.
At the time this was written, the market is negative and is well off the highs made earlier this morning when Federal Reserve Bank of New York President John Williams was interviewed on CNBC.
We found this interview to be a step in the right direction. Williams made the right type of comments regarding future policy, saying that we are, “listening to not only markets but everybody that we talk to, looking at all the data and being ready to reassess and re-evaluate our views.”
Williams also added, “We did not make a decision to change the balance sheet normalization right now but as I said, we’re going to go into the new year with eyes wide open, willing to read the data, and re-assess the economic outlook and take the right policy decisions.”
These comments represent a far more dovish tone compared to the damage Powell did on Wednesday. With regards to the second statement, it strongly contrasts Powell who shut down the idea of a change in approach to the balance sheet. How the Fed has handled the unwinding of the balance sheet is in unprecedented territory, however this and the combination of rising interest rates may be producing too tight of a monetary policy.
Where do we stand overall? We view this as a step in the right direction, but we still need to see more. What he didn’t do is repudiate the judgment that the economy is still strong. He is still on the wrong side and that led to us giving up the gains. We need to see more officials share this dovish, data dependent, and not blinded by the risks of a slowing economy tone.
On Friday morning, before the opening bell, the Bureau of Economic Analysis reported, in its “third” reading (based on a more complete set of data than the second reading released last month on Nov. 28), that real Gross Domestic Product — GDP adjusted for inflation, our best gauge for economic growth — increased at a seasonally adjusted annual rate of 3.4% in the third quarter of 2018, a tick short of expectations for a 3.5% increase and below the 3.5% advance estimated in the second reading. This follows an unrevised 4.2% annual rate in the second quarter of the year.
The headline reading was reduced as a result of downward revisions to personal consumption expenditures (PCE) and exports, factors partially offset by an upward revision to private inventory investment.
Regarding PCE, a crucial metric given the importance of consumption to U.S. economic growth, we note that on a seasonally adjusted annual basis, the PCE index came in at +3.5 from the preceding period, below the +3.6% increase expected by analysts and down from +3.6% previously reported.
All in all, despite the minor revisions we believe the reading points to a strong U.S. economy that, while slowing, continues to grow. That said, we note that this is a backward looking estimate and the indications of a slowdown, however minor, are not to be ignored. It is for this reason we believe the market has seen so much volatility on the back of Fed Chair Jerome Powell calling for two more rate hike in 2019.
Looking ahead, the “advance” estimate on fourth-quarter GDP estimates will be released on Jan. 30.
digging even deeper into the GDP data can view the official release here.