In the second quarter, only two sectors of the economy contributed positive growth, and deteriorating trends suggest our “Good but not great” growth outlook for the economy will come under pressure in coming quarters. Slowing growth is one reason the Federal Reserve has shifted toward easier monetary policy, but importantly, U.S. central bankers are also responding more reasonably to slowing global macroeconomic conditions and persistently low inflation. With the Fed actively easing, our baseline forecast does not include an imminent recession, but the call is increasingly difficult to make as slower growth produces a fragile economy more susceptible to shocks.
Following a month-long delay due to the government shutdown, officials confirmed what economists and investors already suspected – the economy is slowing. We expect growth to continue to slow towards the 2.0% – 2.5% pace characterized by the post-Financial Crisis expansion, though we caution the potential for Q1 2019 growth to surprise to the downside. However, as we detail in the letter, the domestic economy is on reasonably sound footing, and the economic expansion has room to run if the Fed sticks to their new narrative of being patient.
We typically distribute this report at the time of the quarterly GDP release, but the delay worked to our advantage. In addition to reporting the fastest quarterly economic growth in four years, the Bureau of Economic Analysis revised several years of recent economic data and “found” $3 trillion of previously unreported income. The revision is a game-changer as it relates to perspectives on the status of the consumer, which is a critical input to future GDP growth.