GDP to grow at a 2.3% annualized pace

Developments since our Annual Economic Outlook

Our forecast now looks for Q4-19 GDP to grow at a 2.3% annualized pace. That is an upgrade from our prior forecast of 1.5%, but the change is largely a function of a bigger-than-expected narrowing in the trade deficit. Our quarterly economic growth numbers are a little lumpy, partially reflecting trade quirks and the ongoing production struggles at Boeing. Through the noise, we expect core domestic demand to rise at around a 2% pace over the next few quarters.

We continue to look for the Fed to keep the fed funds rate unchanged for the foreseeable future. Economic growth appears to be stabilizing, and the recent détente on trade between the United States and China should give the Fed confidence to pause, so long as the truce holds. That said, a reversal of last year's insurance cuts remains a long ways off. Our 2020 year-end forecast for the 10-year Treasury yield remains at 2.20%.

Since our last update, we have made no material changes to our international forecast. Our forecast for real global GDP growth remains largely unchanged, and we continue to expect the European Central Bank to cut rates 10 bps in March.

US Growth Outlook

Real GDP growth forecast for Q 4 2019 2 3 %% (seasonally adjusted annualized rate)

Change since last Monthly Economic Outlook 0 8 percentage points 

Our upwardly revised forecast is almost entirely a function of a larger boost to growth from net exports The November trade report revealed a much larger narrowing in the trade deficit than we had previously anticipated, as imports fell for the third straight month We had penciled in a modest boost from trade in Q 4 but accounting for the outsized November gain we now look for net exports to add 1 4 percentage points to the headline Q 4 figure This is partially offset by a slower inventory build We expect f inal sales to private domestic purchasers a measure of underlying strength of the domestic economy to rise nearly 3 in Q 4

Real GDP growth forecast for full year 2020 2 1 %% (year over year percent change)

Change since last Monthly Economic Outlook 0 2 percentage points

Ongoing struggles with Boeing's 737 MAX may result in some lumpy quarterly estimates for equipment spending, inventories and net exports in H 1 2020 Looking through that noise domestic demand should continue to grow at a solid rate We expect consumer spending to grow at about a 2 pace, and look for equipment spending to gradually climb out of its present slump on its way to a 3 4 pace of growth Residential construction is also expected to be a bright spot amid low mortgage rates.

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