US: Do not fear another Q1 growth slowdown – Deutsche Bank

Research Team at Deutsche Bank points out that different measures of US economic performance have diverged sharply in recent weeks.

Key Quotes

“Survey-based, or soft, data have improved significantly and point to a pickup in real GDP growth above 3% entering 2017. However, continuing a recurring trend, hard data appear to have softened in the first quarter, with some trackers pointing to real GDP growth of only about 1%.”

“While another Q1 growth disappointment is possible, we detail five reasons why it should not be feared: (1) GDP growth is likely to be understated due to lingering issues with seasonal adjustment; (2) the weak growth signal from hard data is inconsistent with more supportive indications from surveys, sentiment data, and financial conditions; (3) even if real GDP growth slows, private domestic demand growth looks solid, with capex and housing improving; (4) slowing real consumer spending growth is driven in part by an uptick in inflation and should thus prove temporary; and (5) prospects for President Trump's policy agenda will continue to be the key driver of shifts in the US growth outlook.”

“We estimate that lingering issues with seasonal adjustment may artificially depress Q1 real GDP growth by as much as 1 percentage point. This estimate is about three-tenths of a percentage point below San Francisco Fed estimates in August 2015, suggesting that, while issues with residual seasonality may remain, they are likely dissipating.”

“Although earlier episodes of slower growth have led to delays in the Fed's tightening plans, we think this time is different. The recent weakness in the hard data is not corroborated by other indicators and should be appropriately discounted by the Fed. More importantly, the economy is now very close to the Fed's targets of full employment and 2% inflation, leaving the risks to the outlook more balanced than in previous years. A weak Q1 should therefore not prevent the Fed from raising rates again by June. Risks around three rate increases in 2017 should at the very least be viewed symmetrically, and are in fact tilted to the upside if growth approaches our forecast for this year.”