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Consumer Optimism Holds Steady, But Virus Remains a Threat

The viral outbreak spreading across the globe could threaten economic growth and consumer spending.

First quarter U.S. gross domestic product is tracking in the 2 percent range, setting the stage for a 2020 GDP growth rate of 2 percent, already a slight slip from 2.1 percent in the fourth quarter.

On top of that, data from IHS Markit projected first-quarter retail sales will slip to 1.8 percent growth from 2.3 percent in the fourth quarter.

“Real GDP grew 2.1 percent on a quarterly annualized basis during [the fourth quarter]–a solid outcome–which is roughly in line with the pace averaged over the past decade,” Wells Fargo Securities acting chief economist Jay H. Bryson said, adding that “year-to-year, real GDP is up 2.3 percent.” The 2.1 percent seasonally adjusted annual rate matched that of the third quarter, ensuring that the Federal Reserve’s target range for rates remain unchanged.

However, the potential impact from the coronavirus is a new unknown for the market.

“For the U.S. economy, the knock-on effects are most evident in consumer spending and interruptions in production due to supply chain constraints,” Bryson said Monday.

The 2003 SARS outbreak shook consumer confidence, Bryson said, and some categories like travel suffered steep declines. The weakness then was short-lived, and provided the current outbreak does not become more widespread than SARS, there’s a good chance “consumer spending will likely not be materially affected,” he said.

While production outages could impact U.S. factories—and because China has a bigger role in the world economy now than at the dawn of the 21st century—Bryson returned to Japan’s 2011 Fukushima nuclear disaster as a point of reference. That situation also saw temporary headwinds, suggesting the U.S. production cuts would probably be limited. “The smaller role for U.S. manufacturing means the threat to broader U.S. growth is limited,” Bryson said.

Meanwhile, consumers⁠—for now⁠—continue to spend as their optimism holds steady. Whether that optimism will continue throughout 2020, however, remains to be seen.

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The Conference Board’s Consumer Confidence Index rose to 131.6 in January from 128.2 in December. The present situation component rose to 175.3 from 170.5, while the expectations portion was at 102.5 from 100.0 in December.

“Optimism about the labor market should continue to support confidence in the short-term and, as a result, consumers will continue driving growth and prevent the economy from slowing in early 2020,” Lynn Franco, The Conference Board’s senior director, economic indicators, said.

A more positive assessment of the current job market and future job prospects helped fuel the increase in consumer confidence sentiment. Those were said jobs were “plentiful” rose to 49 percent from 46.5 percent, while those looking ahead six-months out who expect jobs to be plentiful rose to 17.2 percent from 15.5 percent.