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Atlanta Fed Trims Second-Quarter GDP Forecast to 1.1% From 1.6%

Atlanta Fed Trims Second-Quarter GDP Forecast to 1.1% From 1.6%

Wednesday, 15 May 2019 12:40 PM

The U.S. economy is expanding at a 1.1% annualized rate in the second quarter, based on weaker-than-expected April data on retail sales and industrial output, the Atlanta Federal Reserve’s GDPNow forecast model showed on Wednesday.

This was slower than the 1.6% pace estimated by the Atlanta Fed’s GDP program on May 9.

The Atlanta Fed said its gross domestic product projection program lowered its estimates on consumer spending growth in the second quarter to 3.0% from 3.2%, and on private domestic investment to a drop of 5.7% from a drop of 3.7%.

The economy grew at a 3.2% rate in the January-March period.

The Atlanta Fed revision came hours after the government said U.S. retail sales unexpectedly fell in April as households cut back on purchases of motor vehicles and a range of other goods, pointing to a slowdown in economic growth after a temporary boost from exports and inventories in the first quarter.

The moderation in economic activity was underscored by other data on Wednesday showing a drop in industrial production last month. The economy is slowing as the stimulus from the White House's $1.5 trillion tax cut package fades.

President Donald Trump's escalating trade war with China, which triggered a steep U.S. stock market sell-off, is seen hurting business confidence and undercutting spending on equipment.

Following the weak reports on Wednesday, some economists cut their second-quarter growth estimates.

"Not a great start to the current quarter, suggesting GDP growth downshifted to a 1.5% (annualized rate) in the second quarter from 3.2% (pace) in first quarter," said Sal Guatieri a senior economist at BMO Capital Markets in Toronto.

The Commerce Department said retail sales slipped 0.2% last month. Data for March was revised slightly up to show retail sales surging 1.7%, the largest increase since September 2017, instead of the previously reported 1.6% jump.

Economists polled by Reuters had forecast retail sales gaining 0.2% in April. Retail sales in April increased 3.1% from a year ago.

The National Retail Federation blamed the downbeat sales on slower tax refunds and the weather, including flooding in the Midwest, and “blizzards and extreme temperature swings” elsewhere. Given the stock market rout and cooler temperatures in May, which could have delayed summer purchases, a strong rebound in retail sales in unlikely.

Excluding automobiles, gasoline, building materials and food services, retail sales were unchanged in April after marching 1.1% higher in March. These so-called core retail sales correspond most closely with the consumer spending component of GDP.

Consumer spending accounts for more than two-thirds of economic activity. While March’s strong core retail sales set consumer spending on an upward trajectory in the second quarter, last month’s weakness suggested a moderate pickup in spending. But consumption remains underpinned by a strong labor market, marked by the lowest unemployment rate in nearly 50 years.

“Whatever caused last month’s disappointment, the general backdrop for consumers still looks pretty favorable,” said Michael Feroli, an economist at JPMorgan in New York. “But the quarter got off to a rough start, and we estimate real consumption was down 0.2% last month.”

The dollar was little changed against a basket of currencies, while U.S. Treasury prices rose. Stocks on Wall Street turned higher after a report that Trump might delay a decision to impose auto tariffs.

Morgan Stanley cut its consumer spending growth estimate for the second quarter to a 1.6% annualized rate from a 2.0% pace. The bank lowered its second-quarter GDP growth estimate to a 1.2% rate from a 1.5% pace.


Slower consumer spending early this year led to a build-up of inventories, which is putting pressure on industries.

In separate report on Wednesday, the Federal Reserve said industrial production fell 0.5% in April after rising 0.2% in March.

The third drop in production this year was led by manufacturing. Output at factories declined 0.5% as motor vehicles and parts production tumbled 2.6%.

Manufacturing production was unchanged in March.

Automobile assembly plants are cutting back production as slowing sales have led to a glut of vehicles in showrooms.

Production was also hammered by a 1.8% tumble in aircraft and parts output last month. The drop, which was the largest since 2013, probably is the result of Boeing cutting production of its troubled 737 MAX aircraft.

Boeing’s fastest-selling 737 MAX jet was grounded in March after two fatal plane crashes in five months.

“We expect manufacturing to remain under pressure in the coming months,” said Sarah House, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

“The latest escalation in the trade war between the United States and China is not likely to immediately show up in next month’s production figures ... but disarray to global supply chains and heightened levels of uncertainty are likely to negatively impact investment.”

Another report from the Commerce Department on Wednesday showed motor vehicle and parts inventories rising 7.8% year-on-year in March, keeping the inventory-to-sales ratio at an elevated 2.29 months.

With the retail sales report showing sales at auto dealerships dropping 1.1% in April, the inventory overhang could last for a while. Weak auto sales combined with a 0.2% fall in online and mail-order sales and a 1.9% tumble in building materials and garden equipment receipts to hold down retail sales in April.

There were also declines in sales at clothing stores and those selling personal grooming products. Sales at furniture outlets were flat. But receipts at service stations increased 1.8%, likely boosted by more expensive gasoline. Sales at bars and restaurants also rose moderately last month, as did receipts at hobby, musical instrument and book stores.

The next GDPNow update is Thursday, May 16.

© 2020 Thomson/Reuters. All rights reserved.

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The U.S. economy is expanding at a 1.1% annualized rate in the second quarter, based on weaker-than-expected April data on retail sales and industrial output, the Atlanta Federal Reserve’s GDPNow forecast model showed on Wednesday.
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Wednesday, 15 May 2019 12:40 PM
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