February 28, 2019

“The future ain’t what it used to be.” - Yogi Berra.

Various indicators pointed to soft momentum at the end of 2018 and early in 2019.  Downbeat economic reports indicated less momentum than previously thought. GDP for the 4th quarter was a still healthy 2.6% annualized rate after running at a 3.2% annualized rate for the first 3 quarters of 2018.  Suspiciously, weak December retail sales, sluggish industrial production, soft durable goods orders and a monthly decline in leading Economic Indicators had economists downgrading the forecasts for economic activity and took a toll on both consumer and business confidence.  To be sure, the partial government shutdown may have skewed the delayed data and the measures of consumer and business sentiment while off their highs are still above their historical averages.  Unusually harsher than normal weather in parts of the country during December, including the third largest snowstorm across much of the southeastern and eastern seaboard of the U.S., may have also contributed to weak readings.  The slowdown signals should not be confused with recession signals but the onslaught of weak economic reports cloud the near term outlook.


“When you come to a fork in the road, take it.” - Yogi Berra

The Fed hit the pause button on normalizing rates in January.  In addition to delay and mixed data that makes determining the underlying momentum of the economy difficult, the case for raising rates had diminished due to cross currents that included slowing global growth and trade tensions.  Coupled with rates being in the lower range of estimated neutral rates, those that are neither accommodative nor restrictive, and inflation gauges benign, the FOMC saw little risk to being patient while assessing incoming data and giving time to see how the cross currents resolve themselves.

Small and Large Business Optimism

If you don’t know where you are going, you might wind up someplace else.” - Yogi Berra

The minutes of the January FOMC meeting also had a cautious tone and depicted a high degree of uncertainty.  Albeit downside risks to the outlook due to the cross currents had increased, forecasts remained optimistic that economic growth would remain solid, though slower than in 2018.  The minutes suggested that the bias for interest rates was higher, even if low inflationary pressures allowed the Fed to be patient.  The minutes showed Committee members debating whether further rate hikes will be necessary, but not contemplating rate cuts.  Members continued to view sustained expansion, strong labor market conditions and inflation near 2% as the most likely path ahead.

Consumer Attitudes

“It’s tough to make predictions, especially about the future.”- Yogi Berra

The Fed pause does not necessarily imply an end of rate normalization or an impending recession, as largely priced in the Treasure yield curve.  While economic momentum expected to cool in early 2019, fundamentals remain positive.  The U.S. Economy added an impressive 304,000 jobs in January and wage growth remained strong on a year-over-year basis.  The Job Openings and Labor Turnover survey (JOLTS) showed that job openings rose to another fresh record high.  The still-strong labor market, rising wages, the rebound in stock and commodity markets and easing financial conditions at the start of 2019 should reassure consumers and underpin solid consumer spending in coming months.  Gains in inventory, moderating home prices and recent declines in mortgage rates should provide some support to the housing market.  The Fed will watch incoming data and allow the markets and economy to stabilize before they start tapping the brakes again, likely in the second half of this year.