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US Economic Outlook Wobbles as Volatility Persists

The recent turbulence in financial markets that resulted in December being one of the worst ever one-month performances in the stock market, has softened the outlook for 2019 and beyond, according to a new report from Macroeconomic Advisers by IHS Markit.

The financial analytics firm’s “January U.S. Economic Forecast Flash” from chief U.S. economist Joel Prakken and executive directors Patrick Newport and Ben Herzon said, “When we were preparing this forecast, the S&P 500 was more than 13 percent below our prior forecast for the end-of-year value, implied volatility had spiked and risk spreads had widened beyond our prior assumption. In response, we have removed one Federal Reserve tightening from our forecast and lowered our projection for U.S. Treasury yields.”

Part of that stock market volatility was linked to ongoing uncertainty over U.S.-China trade relations and the threat of further tariffs on Chinese imports. These could include apparel for the first time, which has caused shifts in sourcing plans and concern among importers.

This came as gross domestic product (GDP) growth of 3.4 percent as reported in the Bureau of Economic Analysis’ (BEA) final third quarter estimate, a drop of 0.1 percent below its second estimate. The BEA said the deceleration in real GDP growth in the third quarter primarily reflected a downturn in exports and declines in nonresidential fixed investment and personal consumption expenditures. Imports increased in the third quarter after decreasing in the second.

“We have nudged up our forecast of fourth-quarter GDP growth by 0.3 percent to 2.8 percent, with a markup to fourth-quarter growth of consumer spending more than accounting for the newfound strength,” the economists said. “However, combined with other developments, the net effect was to lower our forecast of GDP growth by an average of 0.1 percentage point per year from 2019 through 2022.”

In conjunction, this raised their projection of the unemployment rate, which they now see bottoming out at 3.6 percent this year, 0.1 percent higher than last month’s forecast. The outlook also has also adjusted the expectation for core personal consumption, a key barometer of retail spending, dropping 0.1 percent to a 2.2 percent increase in the period.

“As we were preparing this forecast, the federal government was in the early days of a partial shutdown [as it still is],” they said. “We have made no explicit adjustments to the forecast to reflect this, but will be making adjustments in our GDP tracking as the situation warrants.”