The U.S. Economy Continues to Hang In There

U.S. Overview

The U.S. Economy Continues to Hang In There

U.S. real GDP grew at a strong annualized pace of 3.2% in Q1-2019, which stood in marked contrast to the widespread discussion early in the quarter about a looming recession. However, the overall GDP growth rate was flattered by a sizeable build in inventories and what was likely only a temporary decline in imports. Real final sales to private domestic purchasers, a gauge of underlying U.S. demand, increased just 1.3%—the slowest pace in nearly six years.

That said, the economy is hardly falling apart. Consumer spending entered the second quarter with strong momentum, and solid income gains should continue to support solid growth in personal consumption expenditures. Construction spending appears to be stabilizing, and public sector spending will continue to impart stimulus to the economy over the next few quarters. Although growth in capital spending is generally lackluster at present and net exports and inventories may exert some headwinds on the overall rate of GDP growth in coming quarters, we look for the economic expansion to remain intact for the foreseeable future.

Despite the 50-year low in the unemployment rate, inflation remains quiescent, which should keep the Fed on hold. Many market participants look for the FOMC to cut rates by the end of the year, but we believe there is a fairly high bar for a rate cut. In our view, growth would need to slow meaningfully and/or inflation would need to recede further to induce the committee to ease policy.

International Overview

Can We Call the "All Clear" for the Global Economy?

Economic data released over the past month from major international economies have been more encouraging. Q1 GDP growth topped expectations in China and in the Eurozone, and monthly activity indicators for those two economies have also been stronger of late.

However, it may be a bit too early to call the "all clear" for the global economy. For one, the sudden re-emergence of concerns about U.S.-China trade tensions highlights the ever-looming risk of geopolitical uncertainty. Moreover, sentiment surveys from the Eurozone and China paint a picture of still-tepid confidence, and it may be some time before these economies display more concrete signs of stabilization. In the United Kingdom, Q1 GDP data are scheduled for release on May 10 and are shaping up to be quite strong, but largely as a result of temporary Brexit stockpiling, suggesting some payback in Q2. With the global economic outlook still somewhat fragile, most central banks seem to be comfortably on hold. The Bank of Canada (BoC) removed its explicit rate hike bias at its April meeting, and as a result, we no longer expect any BoC rate hikes this year. Meanwhile, the Bank of England (BoE) suggested rates may have to rise faster than markets currently expect, but it cut its inflation forecast, and in any event we doubt the BoE will hike rates again at least until next year given lingering Brexit uncertainty. With interest rates on hold at low levels in most major economies, the global economy appears to have some breathing room to regain its footing.

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