U.S. growth cheerleaders dodged a bullet last week when the Commerce Department upwardly revised its fourth-quarter GDP estimate from 1% to 1.4%. But the outlook for the current quarter took a sharp downward turn with Mondays release of new spending and trade data.
Despite a strong pending-home sales number and a Dallas Fed manufacturing report that hit its least-negative level since November, consumer spending rose by an anemic 0.1% in February, with Januarys figure also revised downward, the Commerce Department reported. Consumer spending is huge for the U.S. economy because it comprises about two-thirds of all economic activity.
Meanwhile, the Personal Consumption Expenditures price index (PCE), which is the Federal Reserves preferred inflation gauge, fell short of the central banks 2% inflation target for the 46th straight month.
Atlanta Fed cuts target to 0.6%: Combined with an advance report forecasting a widening U.S. trade deficit in February, the upshot of the new Commerce data is that numerous firms are downgrading their GDP forecasts for first-quarter 2016.
Most notable among them is the Atlanta Federal Reserve branch, which slashed its target by more than half!
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 0.6% on March 28, down from 1.4% on March 24, the Atlanta Fed noted.
Huge payrolls report Friday: Its next GDP update will be April 1, which also happens to be when the Labor Department releases its bellwether nonfarm-payrolls employment report for March.
Other firms also followed suit, but not quite as deeply at the Atlanta Fed. A CNBC/Moodys Analytics estimate pegged growth at just 0.9%, down from an earlier target of 1.4%. Macroeconomic Advisers on Monday estimated GDP at 1%, down from an earlier prediction of 1.5%.
Other forecasters: Amherst Pierpont, 0.6%, down 0.9% from its earlier target; Moodys Analytics, 0.8%, down 0.6%; Action Economics, 1.0%, down 0.4%; and Goldman Sachs, 1.7%, down 0.4%.
Pessimism over business profits: And even before the latest spending and inflation numbers, pessimism about U.S. and corporate growth prospects was increasing. Economists surveyed by the National Association for Business Economics reduced their median 2016 growth forecast for business profits from 5% to 2%, The Associated Press reported.
The survey also found that most economists have lowered their outlooks for economic growth in 2016, and now expect that the U.S. will grow 2.2% this year, on average, it added. Thats down from a December prediction of 2.6% growth. The survey also found that 79% of economists lowered their growth outlook for 2017.
And as a result of these GDP downgrades, the Fed likely will feel increasing pressure to slow the pace of its interest-rate increases, already projected at just two this year after it had announced in December a possible four hikes during 2016.
Weakening momentum: It speaks to the weakening in domestic economic momentum at the start of this year, further reinforcing the Feds cautious monetary-policy bias, TD Securities economist Millan Mulraine told Reuters.
Conventional wisdom holds that gold tends to do better in low-interest-rate environments; thus, if the slowing U.S. economy means that the Fed likely will be letting rates stand pat rather than hiking, the yellow metal should find further support.
For more clues on the Feds direction, stay tuned for a speech by Chairwoman Janet Yellen on Tuesday, as well as separate public appearances by a host of Fed officials this week. Also set for release Friday is the all-important March jobs report, which could be a gigantic market mover given that GDP expectations have tumbled so dramatically.