The Atlanta Federal Reserve slashed its fourth-quarter economic-growth estimate to below 2 percent Thursday after

The Atlanta Fed GDP Now lowered its estimate for 4Q growth to 1.8% from 2.3% on Jan. 10.

“After this morning's retail sales release from the U.S. Census Bureau, the nowcast of fourth-quarter real personal consumption expenditures growth declined from 2.3 percent to 1.6 percent,” the Atlanta Fed said.

The Atlanta Fed revision came hours after U.S. retail sales increased for a third straight month in December, with households buying a range of goods even as they cut back on purchases of motor vehicles, suggesting the economy maintained a moderate growth pace at the end of 2019.

As of Jan. 10, the New York Fed Staff Nowcast stands at 1.1% for the fourth quarter and 1.2% for the first quarter of 2020.

The Commerce Department estimated that the economy grew at a moderate 2.1% annual rate over the summer, slightly better than it had previously estimated.

For the July-September quarter, the rise in the gross domestic product, the economy’s total output of goods and services, exceeded the government’s initial estimate a month ago of a 1.9% annual rate. A key reason is that businesses didn’t cut back on investment spending as much as first estimated.

The economy had begun the year with a sizzling 3.1% GDP rate, fueled largely by the now-faded effects of tax cuts and increased government spending.

Many analysts worry that GDP growth slipped in the October-December quarter to a 1.4% annual rate or less as business investment weakens further. But most say the slowdown won’t likely be as severe as it might have been because consumers, who drive about 70 percent of the economy, are signaling that they will likely keep spending through the holiday shopping season and into next year. That spending is being supported by rising incomes and an unemployment rate that is near the lowest levels in a half century.

On Thursday, the government said U.S. retail sales increased for a third straight month in December, with households buying a range of goods even as they cut back on purchases of motor vehicles, suggesting the economy maintained a moderate growth pace at the end of 2019.

Other data on Thursday showed the number of Americans filing claims for unemployment benefits dropped for a fifth straight week last week, indicating the labor market remained strong despite a recent slowdown in job growth. That should help sustain consumer spending and probably keep the longest economic expansion on record, now in its 11th year, on track.

The Federal Reserve on Wednesday described the economy as having continued to expand modestly in the final six weeks of 2019. The U.S. central bank has signaled that it could keep interest rates unchanged at least through this year after reducing borrowing costs three times in 2019.

"There's more fuel in the tank of this economic expansion," said Chris Rupkey, chief economist at MUFG in New York.

The Commerce Department said retail sales increased 0.3% last month. Data for November was revised up to show retail sales gaining 0.3% instead of rising 0.2% as previously reported. Economists polled by Reuters had forecast retail sales would gain 0.3% in December. Compared to December of last year, retail sales accelerated 5.8%. Sales increased 3.6% in 2019.

Excluding automobiles, gasoline, building materials and food services, retail sales rebounded 0.5% last month after falling by a downwardly revised 0.1% in November.

The so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. They were previously reported to have edged up 0.1% in November. Core retail sales for October were also revised lower.

Overall sales rose in December despite retailers such as Target Corp, Kohl's, J.C. Penney and Macy's reporting a decline in sales for the holiday period as foot traffic in malls dropped.

Though a report last week showed a slowdown in job growth in December and the increase in the annual wage gain retreating to below 3.0%, the labor market remains on solid footing.

In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 204,000 for the week ended Jan. 11.

Economists had forecast claims would rise to 216,000 in the latest week.

The dollar was little changed against a basket of currencies, while U.S. Treasury prices fell. Stocks on Wall Street were trading higher, with the S&P 500 index crossing the 3,300 threshold for the first time, as upbeat earnings from Morgan Stanley and a tech rally added to optimism from an initial U.S.-China trade deal.

SOME RED FLAGS

While claims are trending lower, there are some worrying signs emerging. The claims data showed layoffs in manufacturing, transportation and warehousing, construction, educational services and accommodation and food services industries in late 2019 and early 2020.

Some of the job losses in manufacturing, which were spread across at least eight states, could be related to the 18-month trade war between the United States and China, which has hurt business confidence and undercut capital expenditure. U.S. President Donald Trump and Chinese Vice Premier Liu He signed a "Phase 1" trade deal on Wednesday, a first step toward defusing the trade war.

But with U.S. duties remaining in effect on $360 billion of Chinese imports, about two thirds of the total, economists do not expect the initial deal to provide a boost to manufacturing, which is in recession.

A third report on Thursday from the Philadelphia Fed showed factory activity in the mid-Atlantic region accelerated in January, with manufacturers reporting receiving more orders. But a measure of unfilled orders at factories in the region that covers eastern Pennsylvania, southern New Jersey and Delaware contracted and manufacturers cut hours for employees.

Even as trade tensions have eased, a pall remains over manufacturing, which accounts for 11% of the economy. Boeing has suspended production of its fast-selling 737 MAX jetliner starting this month and ripple effects are already being felt, with a major supplier announcing layoffs last week.

"Manufacturing will grow at a subdued pace in 2020, constrained by slower external and domestic growth as well as ongoing uncertainty on the trade policy front despite the Phase-one trade deal," said Oren Klachkin, lead U.S. economist at Oxford Economics in New York.

For now, consumers appear set to continue driving the economy, also thanks to house prices and a bullish stock market.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 3.2% annualized rate in the third quarter. Given the downward revisions to October and November core retail sales, growth in consumer spending is expected to have slowed to around or below a 2.5% rate in the fourth quarter.

Growth estimates for the fourth quarter are as high as a 2.5% rate, in part because of a drop in imports, which compressed the trade deficit. The economy expanded at a 2.1% pace in the July-September period.

In December, auto sales fell 1.3%, the biggest drop since last January, after increasing 1.5% in November. Higher gasoline prices lifted receipts at service stations, which jumped 2.8%. Online and mail-order retail sales rose 0.2% after being unchanged in November.

Sales at electronics and appliance stores rebounded 0.6% in December. Receipts at building material stores surged 1.4% and sales at clothing stores accelerated 1.6%. Spending at furniture stores edged up 0.1%. Americans also spent more at restaurants and bars, with sales rising 0.2% last month. Spending at hobby, musical instrument and book stores rebounded 0.9%.