US: Another ugly first quarter? – Capital Economics

The early activity data for January have come in below expectations, raising the possibility that economic growth may once again disappoint in the first quarter, according to analysts at Capital Economics.

Key Quotes

“Both industrial production and headline retail sales declined last month, with the latter suggesting that, after a near-4% annualised surge in the fourth quarter of last year, real consumption growth may slow quite sharply in the first. That said, the rapid growth of domestic demand towards the end of last year was always unlikely to be sustained. And the January ISM activity surveys are consistent with GDP growth of more than 4% y/y. (See Chart.) Accordingly, for now at least, we still expect first-quarter GDP growth to be between 2.5% and 3.0% annualised. Moreover, with the turmoil in financial markets having eased and mounting evidence that underlying price pressures are starting to build, even a temporary lull in activity growth is unlikely to throw the Fed off course.”

“Output and activity indicators point to weaker manufacturing output growth in the first quarter.”

“Consumption indicators show that households have shrugged off the recent market volatility.”

“Investment indicators suggest that business equipment investment may start to slow.”

“External indicators reveal that strong export growth has been outweighed by a surge in imports.”

“Labour market indicators are consistent with a steady rise in wage growth this year.”

“Inflation indicators show that a broad-based rebound in core inflation is underway.”

“Financial markets indicators reveal that corporate bond yields remain low despite the sell-off in the Treasury market.”