Modest Growth in Q1

From mid-2009 through early 2017, the US economy grew at a real average annual rate of 2.2%. Not a recession, but not robust growth either, which is why we called it a Plow Horse Economy.

For the first quarter of 2018, we expect growth of 1.9% at an annualized rate, right in-line with a Plow Horse.

But that doesn't mean the economy is still a Plow Horse. It isn't. Growth has picked up, even if last quarter doesn't show it. Even with a 1.9% growth rate in Q1, real GDP is still up 2.7% from a year ago, and we anticipate an average growth rate of around 3% this year and next year with higher odds of growth exceeding that pace rather than falling short.

Taxes and regulations have been cut and monetary policy remains loose. Look for a significant acceleration in growth in the quarters ahead.

Here's how we get to 1.9% for Q1. But, keep in mind that we get reports on shipments of capital goods on Thursday as well as early data on trade and inventories, so we could end up tweaking this forecast slightly later this week.

Consumption: Automakers reported car and light truck sales fell at a 12.4% annual rate in Q1, in large part due to a return to trend after the surge in sales late last year following Hurricanes Harvey and Irma. Meanwhile, "real" (inflation-adjusted) retail sales outside the auto sector declined at a 0.8% annual rate. However most consumer spending is on services, and growth in services was moderate. Our models suggest real personal consumption of goods and services, combined, grew at a 1.2% annual rate in Q1, contributing 0.8 points to the real GDP growth rate (1.2 times the consumption share of GDP, which is 69%, equals 0.8).

Business Investment: It looks like another quarter of solid growth, with investment in equipment growing at about a 5% annual rate, and investment in intellectual property growing at a trend rate of 5%, as well. Meanwhile, commercial construction looks unchanged. Combined, it looks like business investment grew at a 4% rate, which should add 0.5 points to real GDP growth. (4.0 times the 13% business investment share of GDP equals 0.5).