Economic Pessimism Derailed Again

Economic pessimism for the US has had a rough ride in recent years.


By James Picerno

The macro trend has wobbled several times since the last official recession ended in 2009, but each time the economy righted itself and the expansion rolled on. But new doubts emerged in the second half of 2019 and the long knives of dark predictions returned anew. For now, the pessimists have been proven wrong, again. In fact, there are hints that growth may be picking up a bit. Key data releases later this week will stress test the case for optimism. Here’s a quick review of what’s on the docket for economic reports in the days ahead.

Let’s begin with a big-picture overview of what’s at stake, namely, the stabilization of the economy after last year’s slowdown in the second half. Today’s revised nowcast of the upcoming fourth-quarter GDP report (scheduled for Jan. 30) ticked down to a 1.8% gain, fractionally below last week’s estimate, based on the median of several models. A 1.8% increase is also modestly below Q3’s 2.1% gain. Slow growth that eases further is worrisome at this stage in the economic cycle, although the current Q4 estimate continues to suggest that recession risk remains low.

Even if output slips a bit, it’s still fair to say that Q4 data will probably show that the economic trend that prevailed in Q3 will continue in the official numbers for Q4 that will be published later this month. That is unless a trio of December updates tells us otherwise, starting with the retail sales report that’s due on Thursday (Jan. 16).

Economists, however, are upbeat.’s consensus point forecast calls for a 0.4% rise in retail spending. Translating that forecast into a one-year change points to a substantially stronger 6.0% increase, which would mark the fastest annual gain since August 2018. Holiday spending, it seems, ramped up last month.

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The implied one-year rise in consumer spending (NYSEARCA:XLY) for December is a bit higher than the average point forecast via The Capital Spectator’s combination-forecasting model, which is projecting a 5.8% year-over-year increase. Nonetheless, in both cases the one-year trend looks set for a conspicuous acceleration.

Friday’s update on housing starts for December also look set to report a material improvement in the one-year trend, based on’s consensus point forecast. Residential housing construction is on track to accelerate to a 20% year-on-year gain, marking the fastest pace in over three years.

By contrast, the recession in the industrial sector is expected to continue via Friday’s update from the Federal Reserve. Using’s consensus point forecast as a guide indicates that the one-year change in industrial production will fall 1.1%, marking the fourth straight month of red ink on an annual basis.

For now, there are no signs that weakness in the industrial activity is spilling over to the broader economy. That could change, of course, but so far the broad macro trend appears relatively resilient to manufacturing’s decline.

In fact, there are hints that economic activity overall may be picking up. As reported in this week’s issue of The US Business Cycle Risk Report, the Economic Trend and Momentum indices are no longer falling. On both fronts, economic activity is holding steady after a period of downshifting.

Projecting ETI and EMI into the near-term future (February 2020) via an ARIMA model suggests that a mildly firmer macro trend may be unfolding.

The future is always uncertain, of course, and perhaps more so than usual, courtesy of heightened geopolitical risk in the wake of this month’s US-Iran military events. But using data available today leaves room for a modest degree of optimism—until or if the numbers set for release in the days ahead paint a different narrative.