Economy Closes Out 2018 on a Good Note - March 4, 2019

The Q4 report on GDP (Gross Domestic Product—the widest measure of goods and services produced) was delayed by a month due to the government shutdown. On Thursday, the U.S. BEA reported the economy expanded at an annual pace of 2.6% in Q4, topping expectations of 2.2% per the Wall Street Journal.

For the year, the economy grew 3.1%, the first time this decade GDP has exceed 3% on a calendar basis and the best reading since 2005 (St. Louis Federal Reserve).

Worries that headwinds from trade tensions and financial market volatility would throw cold water on capital spending were unfounded. Instead, business investment accelerated in Q4. Maybe it’s a sign that incentives provided in the tax overhaul last year are working. If so, it could aid productivity in the years to come. Or, business confidence hasn’t waned as much as some surveys suggest.

But, a note of caution. It’s old data: October—December. We’ve entered March, and Q1 is two-thirds in the rearview mirror.

Current economic reports aren’t signaling a near-term recession. The same can be said of upbeat sentiment in the market. But, more recent data are suggesting economic activity in Q1 may continue to moderate.

Long-term view

The graphic below highlights GDP growth going back to 1950. Each horizontal red bar marks the peak of growth during that respective economic expansion. Note that recessions don’t always correspond to negative GDP. They do correspond to a sizable slowdown in GDP growth.

Cyclical peaks have stepped down in 5 of the last 6 expansions – since the early 1970s. Further, the current cycle is the weakest since WWII.

The slowdown is troubling, and experts debate the reasons. It may be demographics, a maturing economy, a combination of the two, or other factors.

A recent piece by Morgan Stanley offers some encouragement. “The population of the Millennials will soon overtake the baby boomers, and Gen Z, born between 1997 – 2012, will overtake the Millennials as the country's largest cohort by 2034,” MS writes.

For the U.S. economy, “The demographic tailwinds created by these high-population cohorts could be significant, delivering the kind of ‘youth jolt’ that the Baby Boomers were famous for.”

If Morgan Stanley’s thesis plays out, the long-term prognosis is encouraging.