Weak Retail Spending In December Weighs On US Q4 GDP Outlook

The unexpected drop in retail sales in December has raised uncertainty about the upcoming report on fourth-quarter gross domestic product (GDP). Prior to yesterday’s update on consumer spending for the final month of 2018 most estimates of the Q4 economic activity reflected moderate growth in the mid-to-high 2% range. But the St. Louis Fed’s GDPNow model slashed the Q4 outlook to a sluggish 1.5% after the release of retail sales data. That GDP estimate is an outlier on the downside at the moment. The question is whether nowcasts from other sources will fall in the days ahead as the latest retail data factors into the calculus?

For some perspective, let’s start by rounding up the current GDP estimates. As the chart below shows, the current median for a set of nowcasts compiled by The Capital Spectator fell to 2.4% for Q4 GDP growth – down from 2.9% in the Jan. 25 update. The main source of the downside revision is due to hefty fall in the GDPNow data, which was cut yesterday to 1.5% from 2.7% previously.


It’s premature to assume that one weak nowcast is the last word on the upcoming Q4 GDP report, which the Bureau of Economic Analysis has rescheduled for release on Feb. 28 (the data was originally scheduled for Jan. 30 but was postponed due to the government shutdown). At the same time, yesterday’s sharp drop in retail spending for December can’t be ignored.

Consumption in the retail sector fell 1.2% in the final month of last year – the biggest monthly slide in more than nine years. The tumble cut the year-over-year trend to a sluggish gain of 2.3% — a 2-1/2 year low.

Some analysts say the weakness in spending may reflect a temporary glitch due to complications in data gathering related to the government shutdown that ended late last month. Perhaps, but even if the report is accurate it’s too early to assume the worst. Indeed, the January update on payrolls was unusually strong,suggesting that retail spending may bounce back.

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