Q4 US GDP Revision To Show Slower Growth

But 2018 GDP growth still ends with a bang!

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The US Commerce Department will be releasing the final revised fourth-quarter GDP figures this week on Thursday. Economists polled forecast that the US economic growth will slow to a pace of 2.4% on the quarter. This marks a downward revision, following the previous estimates showing a 2.6% increase for the period.

According to the initial estimates, the US GDP advanced 2.9% for the full year of 2018. This was just 0.1 percentage point shy of the 3.0% GDP growth that the Trump administration was pursuing.

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Real GDP rose 3.1% for 2018, surpassing the 3.0% threshold for the first time since 2015.

USD GDP
USD GDP YoY

But this could now change with the latest forecasts showing that the annual GDP could wipe out some of the gains.

The delay in the fourth quarter GDP data comes due to the December/January partial government slowdown.

Therefore, as the data comes this week, close to the end of the first quarter, investors are likely to not react to the news.

This is because investors are already focusing on the GDP performance for the first quarter of this year.

Why Did the US GDP Slow During Q4 2018?

US consumer spending is one of the key reports that heavily influences the gross domestic product report. Recent data for the months ending December saw consumer spending slowing alongside falling business investment.

US PCE
US PCE MoM

A recent survey by the Commerce Department, which is the quarterly services survey or QSS, had some interesting revelations. Data showed that the services sector was weak.

Prior to the release of this report, economists were maintaining the view that the US economy was growing around 2.6% during the December quarter.

A number of factors were also contributing to the lower revisions to the GDP for the fourth quarter.

  • Retail sales in December were soft. During the month, retail sales fell 1.2% on a month over month basis. When excluding oil prices, the core retail sales fell by 0.9%. There is also an ongoing weakness in traditional stores. Sales at non-retail stores fell 3.9% during the month.
  • Trade deficit surges to a 10-year high in December. The US trade balance figures for December saw the deficit rising to $59.8 billion. Trade deficit ballooned despite attempts by the Trump administration to rein in the figures. Imports during the period jumped 2.1% but exports fell 1.9% showing waning demand for US produced goods.
  • Weaker consumer spending in December was also partly to blame. On a month over month basis, consumer spending fell 0.5% in December 2018. Overall consumer spending was seen slowing contributing to the view that the GDP grew at a slower pace than the initial estimates.

Will the Q4 GDP Data Impact the Markets?

The impact from the fourth quarter GDP revisions will not be much. The markets are already forward-looking. The recent developments from the Federal Reserve saw the policy makers opting to make no changes to the fed funds rates for the rest of this year.

Investors will be looking rather to the upcoming data to ascertain how the economy grew in the first three months of the year. Of course, one has to wait for a few weeks to get the latest economic reports.

With talks about the US economy in the late growth states of the boom cycle, concerns remain that the first quarter could slow even more, comparing to Q4 numbers.

The tax cuts and other stimulus measures undertaken by the Trump administration are showing signs of fading momentum. Various forward-looking GDP trackers reflect this view.

The Atlanta Fed’s GDPNow tracker is signaling that growth in the first quarter was about 1.2%, with various other measures showing a similar view for the period. There are also prospects for further downside revisions to the first quarter GDP numbers.

It is quite likely that the markets have already discounted the fourth quarter GDP revisions. The speculation for an impending recession also grows. The latest yield curve inverted at Friday’s close last week. The 3 month and 10-year treasury spread was 9bps lower.

An inverted yield curve is seen as a precursor to a recession.

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