US Economic Growth Outlook Falters

US GDP growth in the first three months of 2016 may be as low as 0.1% according to recent forecasts - but Morningstar's Bob Johnson says the full year results will be less worrying

Robert Johnson, CFA 12 April, 2016 | 10:26AM
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Last week was a tough one for global stock markets, as worries about first-quarter economic growth, especially in the U.S., began to set in. Over the past week or so, economic growth expectations have dropped from 2% to well under 1% for the US and as one might expect, that helped make U.S. equities one of the worst performers last week and decreased bond rates. The U.S. 10-year Treasury rate dropped from 1.79% last week to 1.7%.

As recently as two weeks ago, average forecasts were for 2% growth, more recent reports suggest growth of well under 1%

However, the weaker economic expectations did not take their usual toll on oil, with signs that U.S. producers are finally taking product cuts more seriously. Commodities in general were up about 1.5% for the week.

Europe and developed markets outside the U.S. were little changed for the week, which was better than U.S. market performance, as a lot of the poor economic news this week was from the U.S. Emerging markets took it on the chin again, down 2.3% as investors generally moved to risk-off positions as economic prospects dimmed in the U.S., especially in the first quarter.

A combination of surprisingly low auto sales in March, an increased deficit for February announced on Tuesday, along with revised data in the factory order report; inventories and shipments, sent economists back to their drawing boards. That was before the wholesale trade report that inventories were declining again and likely to further depress GDP growth rates. As recently as two weeks ago, average forecasts were for 2% growth.

Last Tuesday, a Wall Street Journal poll showed consensus growth of 1.3%, but more recent reports suggest growth of well under 1%. The Atlanta Fed's GDPNow forecast is down to just 0.1%. A negative GDP print is indeed a possibility, though not quite the likeliest case.

The first quarter has a track record of being unusual and has produced poor reports, so we are not particularly concerned. GDP growth was negative in the first quarter of 2014 and just 0.7% in the first quarter of 2015. Statisticians haven't caught up with changing spending patterns, and weird weather hasn't helped matters, either. Even if the first quarter shows no sequential growth, the year-over-year growth rate in GDP will likely approach 2%, hardly worrisome.

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Robert Johnson, CFA  is director of economic analysis with Morningstar.

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