Moderate Growth in Q4

Back in mid-November, the highly respected GDP forecasting model from the Atlanta Federal Reserve Bank (also known as "GDP Now"), estimated that real GDP would only grow at a 0.3% annual rate in the fourth quarter, which, if accurate, would have been the slowest growth for any quarter since 2015. At the time, we were forecasting economic growth at a 3.0% rate.

Now, nine days from the government's first official report on Q4 GDP, the Atlanta Fed's model is saying 1.8%, while we're at 2.5%. In other words, they've moved a lot higher, we've moved a little lower. The consensus among economists is 2.1%, right between our forecast and the Atlanta Fed's.

Here's the thing: international trade and inventory figures are likely to have a huge impact on Q4 real GDP, with international trade a positive factor and inventories a negative. Trade relations with China were very volatile until recently, in part explaining a big drop in imports in Q4, which has a temporary positive influence on GDP. But, at the same time, fewer imports also meant less inventory accumulation in Q4.

We're telling you this because the day before the GDP report next week, we will get reports on both trade and inventories, which might lead us to make a substantive revision up or down to our 2.5% forecast.

Either way, what's most important is the trend, and we see healthy economic growth coming in 2020. Monetary policy is far from tight, companies are still adapting to a world where corporate profits earned in the US face lower tax rates, the regulatory environment has become more favorable, home building is poised to add to GDP, and consumer purchasing power (already strong) is growing.

Here's how we get to our 2.5% real growth forecast for Q4:

Consumption: Car and light truck sales shrank at a 5.3% annual rate in Q4, while "real" (inflation-adjusted) retail sales outside the auto sector shrank at a 1.4% rate. So far, not so good. But most of consumer spending is on services, and it looks like real spending on services grew at a 2.4% rate. Take the good with the bad, and it suggests real personal consumption (of goods and services combined) grew at a 1.9% annual rate, contributing 1.3 points to the real GDP growth rate (1.9 times the consumption share of GDP, which is 68%, equals 1.3).