I’ve noticed recently that many economists and ‘experts’ appear to be resetting their expectations for when the U.S. economy might enter a recession. Many now seem to believe it could happen as soon as this year, and some are citing a host of economic data that appears to show a U.S. economy weakening on many fronts.
One of the major causes of concern came from weak data in the biggest contributor to overall U.S. GDP: consumer spending. Since the current U.S. economic expansion began in 2009, retail sales have risen an average of 0.4%. That’s why it came as a shock to Wall Street when government data showed that retail sales fell -1.2% month-over-month in December, which is typically a sturdy month for consumer spending.
It was the largest retail sales drop since September 2009, and it was widely unexpected. Consensus estimates were forecasting a modest, but still positive +0.1% increase in retail sales for the month. To make matters more troubling, the weakness in retail sales appeared to be broad-based: sporting goods stores sales dropped -4.9%, department stores fell -3.3%, and non-store retailers (which includes e-commerce) declined -3.9%. miscellaneous store retailers fell -4.1%, non-store retailers — which includes online retailers — dropped 3.9%.
Attention also shifted to declining U.S. home sales, which registered a -6.4% drop in December to fall to their lowest level in three years. The Conference Board’s Leading Economic Indicator (LEI) index, which has historically been a reliable barometer of U.S. economic activity, also reported a decrease of -0.1%.
But perhaps the most notable and real cause of concern came in the arena of U.S. corporate earnings. Corporations steadily issued negative revisions to earnings estimates for the current and coming quarters, which have left growth expectations for the first half of 2019 barely in positive territory. This negative revision trend is a function of uncertainty about global economic growth, with a host of leading companies in different industries citing weakness in China, Europe and elsewhere as the driver of weak guidance. In my view, the numbers tell a clear story:
Source: Zacks Investment Research, Inc.
Taken together, all signs appeared to point in a similar direction, with the implication being that the U.S. economy was weakening perhaps more quickly than many anticipated.
Key Distinction: Weakening is not the Same as Contracting
All told, the economic data may very well be telling us that the U.S. economy is weakening. But for investors, weakening is not the samething as contracting. And positive economic growth in the U.S. in 2019 appears all but assured, in my view. The Chicago Fed’s Economic Activity Index shows steady activity and modest – but very normal – expectations for future GDP growth:
Source: Federal Reserve Bank of Chicago
Investors should also keep in mind that economic data like retail and existing home sales, while important, is also quite volatile from month to month and even quarter to quarter. Looking back at this economic expansion alone, we can find several instances when economic activity turned negative – particularly in 2015 and 2016. If we continue seeing weak readings for the next few months or even quarters, we should perk up and think about the broader trend. For now, however, a couple of weak readings don’t necessarily portend an end to the expansion.
Bottom Line for Investors
At the end of the day, some of the concern over weak retail sales may be misplaced: the bureau in charge of compiling retail sales data was closed in the later days of December and a majority of January, when much of this data would have been processed and analyzed.7 What’s more, investors should remember that government data on the economy tends to be fairly volatile and is often revised several times before final numbers are released. We might reasonably expect a similar outcome this time around.
Regardless, investors should be cautious not to conflate weakening economic data with negative economic data. You can have one without the other, with the economy still growing albeit at a more modest pace. That’s what I believe we’ll see throughout 2019.