U.S. GDP Could Get Hammered

by Nomi Prins via Daily Reckoning

February is half over, and we’re that much closer to spring.

As far as the markets go, this past week has been driven by a lackluster set of new economic data and heightened concerns about whether the coronavirus is contained or not, whether the Chinese have downplayed the figures or not and what the real economic impact in China and around the world might be.

But we could already be feeling the effects here at home…

The latest information reveals that consumer spending dropped substantially in January. And core retail sales dropped off.

Clothing sales, for example, dropped 3.1% last month. That’s the largest month-over-month decline since March 2009.

U.S. factory output also slackened. Manufacturing output slipped 0.1% from December, mostly due to Boeing’s ongoing production halt for the 737 Max.

Export demand is also a source of concern, as the coronavirus could affect critical supply chains and hamper demand in the weeks and months ahead.

Meanwhile, weak corporate investment could also put a drag on growth.

All these factors may combine to put a big dent in this quarter’s growth…

A new CNBC survey of 11 economists projects that first-quarter 2020 GDP growth will drop dramatically to 1.2%, far below the 2.1% rate from Q4 2019.

A Bloomberg survey is somewhat better, but not much. These economists project a 1.5% growth rate.

While these numbers are weak, economists surveyed by Bloomberg don’t believe the Fed will be cutting rates soon. But they do believe the drop-off in personal consumption makes the economy vulnerable to “exogenous shocks”:

While the economic outlook remains strong enough for the Fed to keep interest rates on hold, personal consumption moderating from last year’s robust pace makes the economy vulnerable to exogenous shocks, such as the halt in production at Boeing and potential supply chain disruptions stemming from the coronavirus.

Since consumer spending is about 70% of GDP, a downturn in spending could hit the U.S. economy hard.

Federal Reserve Chairman Jerome Powell spoke at his regularly scheduled testimony before Congress this week.