We Could See Below 2% Q1 GDP Growth

We headed into the January retail sales report expecting a solid number because consumer confidence was strong. In fact, on Friday, the February University of Michigan consumer sentiment report showed sentiment was close to its cycle high. However, the retail sales report showed little change in the 2-year growth stack and control group sales growth was revised lower and missed estimates.

There’s no evidence of a recession coming, but without a very strong consumer, Q1 GDP growth could be weak because of the negative impact of the coronavirus and the trend of weakness in business investment. The economy should have been coming out of its slowdown in Q1, but that might be delayed by a quarter. Due mostly to the impact of the industrial production report, the NY Fed lowered its Q1 GDP Nowcast from 1.67% to 1.39%. We view the retail sales report not significantly boosting the Nowcast as a negative though because the consumer needs to pick up the slack in the quarter. Due to Friday’s economic reports, Goldman lowered its Q1 GDP tracking estimate by 0.3% to 1.4%.

The Control Group Was Weak

The all-important, control group had a weak report. Monthly growth in December was revised down from 0.5% to 0.3% and growth in January was 0% which missed estimates by 0.3%. It’s not good when the comp gets revised lower and results still miss that lowered bar. The chart below shows the sequential weakness in nominal core yearly retail sales growth.

(Click on image to enlarge)

Source: Oxford Economics

Yearly advanced retail sales growth fell from 5.5% to 4.4%, but the comp rose from 1.6% to 2.7%. That means the 2 year growth stack fell 0.1%. Yearly growth excluding food services fell from 5.4% to 4%; the comp rose from 1.2% to 2.6%. The 2 year growth stack had no change. Finally, real retail sales growth fell from 3.2% to 1.8%. The growth stack improved because the comp rose from -0.4% to 1.6%. The 2 year growth stack was up 0.6%. At first glance, it looks like this was a weak report because yearly growth fell, but the comps make it look a little better.

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