US: Trump Slump? – BMO CM

According to Sal Guatieri, Senior Economist at BMO Capital Markets, softer data on consumer spending and trade warranted a downward revision to their US Q1 growth estimate (to 1.8%), while uncertainty about future fiscal stimulus raises a downside risk for their 2017 growth call (2.4%) 

Key Quotes

“What would the start of another year be without a downward revision to our U.S. growth forecast? Faced with recent weakness in consumer spending and a surge in imports (U.S. firms stocking up ahead of the BAT?), we shaved nearly half a percentage point from our Q1 growth estimate to 1.8%. Instead of gaining pep, the economy looks to have slowed from the already modest pace of 1.9% in Q4. Even worse, the infamous “residual seasonality” problem that has bedeviled the BEA’s estimate of Q1 growth for over a decade—typically carving more than one percentage point from the final tally—suggests further downside risk (the official figure is reported on April 28). This was not the storyline many, including us, touted a few weeks ago in the face of a sharp upswing in investor, household and business sentiment. What gives?”

“Has the Trump bump fizzled? Probably not, as the economy’s underlying health appears intact, with the housing sector continuing to rumble forward, business spending on an upswing, and consumers likely simply recharging their batteries. Last week’s reports showed the Chicago Fed National Activity Index trending at two-year highs the past three months. A 6.1% bounce in new home sales in February to the second highest level in nine-years took the sting out of a 3.7% spill in existing home sales (which were partly hamstrung by a shortage of listings and continue to trend near decade highs). Machinery orders rose for a sixth straight month in February, up an annualized 12.5%.”

“Accordingly, manufacturers are smiling again, with several regional survey measures staying elevated in March (and the Kansas City Fed index hitting a six-year peak). As for consumers, taking a breather isn’t unusual after spending at a heated 3.4% annualized pace the past three quarters. Strong job and income growth, a positive wealth effect from rising equity and house prices, and still-cheap credit should keep shoppers clicking away at online shops and trekking to the malls. Given the still-positive economic backdrop, we actually upgraded our Q2 GDP growth estimate slightly to 2.7%, thereby leaving our 2017 figure unchanged at 2.4%.”

“Alas, whether we will need to take the scalpel out again will depend on whether the February personal spending report surprises to the downside (it’s due next Friday, with real spending expected to stabilize after dipping 0.3% in January). Further out, the timing and scope of fiscal stimulus is key. While we did not assume much direct fiscal boost in our forecast this year (an assumption that will prove prescient if Republicans get lost in the healthcare-reform maze or exit further splintered), we were counting on “animal spirits” arising from expected stimulus to support business spending and the economy.”

“Should sentiment measures take a turn for the worse because of increased uncertainty about tax reforms and infrastructure spending, we would likely need to slice our 2017 outlook. And, if congressional Republicans can’t unite to pass key legislation on fiscal policies, the economic outlook won’t be the only thing at risk come the 2018 midterm elections.”