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Weekly Economic and Financial Commentary: Global Uncertainty Remains Elevated For the Time Being

U.S. Review

Drawing the Curtain on 2018

  • Economic data out the gate this week provided some clarity on how the economy fared through the end of 2018.
  • Real GDP in the United States grew at an annualized rate of 2.6% in the fourth quarter. This marked a deceleration from the breakneck pace seen in the prior two quarters, but was above the market expectation of a 2.2% gain.
  • Q4 GDP data and housing starts and personal income and spending data now available through December, confirmed our expectation of a slowdown in growth to end 2018.

Drawing the Curtain on 2018

Economic data out the gate this week provided some clarity on how the economy fared through the remainder of 2018. The partial government shutdown, which began in December and lasted well into January, had continued to delay important data releases, clouding analysts’ assessments of the economy’s performance. Data on Q4-GDP, and housing starts and personal income and spending data now available through December, confirmed our expectation of a slowdown in growth to end 2018.

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The U.S. Commerce Department released data on Thursday which showed that real GDP grew at an annualized rate of 2.6% in the fourth quarter. While this pace of growth still represents a step down from the strong growth rates experienced earlier last year, at 2.6% growth was above the market expectation of 2.2%.

Real personal consumption expenditures (PCE), grew only 2.8% in the fourth quarter, leading much of the deceleration in GDP growth. The weakness can be traced to the weak spending environment in December, with both personal spending and retail sales experiencing their largest declines since the recession year of 2009. Real PCE was in part boosted earlier last year by personal tax cuts, but these real income-boosting effects will likely fade this year. Personal income rose 1.0% in December, but fell 0.1% in January. Income growth should regain some strength this year, due to the robust labor market.

Consumer confidence data for February suggested consumers have regained some optimism. The present-situation component of the index improved to a cycle-high of 173.5, while the expectations component jumped 14 points. Expectations of job prospects and improvements in income have propelled the outlook, but fewer purchasing plans of autos, homes and major appliances weighed on overall optimism. Taking this anecdotal indication with recent hard data on durable goods orders suggests that growth in capital spending will likely be anemic in the first half of 2019.

After a slow pace of growth in the third quarter, business fixed investment (BFI) spending rebounded at a rate of 6.4% in the fourth quarter. But, the construction components of BFI remained weak. Non-residential construction fell 4.2%, while the residential side declined for the fourth consecutive quarter. A separate press release from the Commerce Department revealed that housing starts plunged 11.2% in December. Mortgage rates were up to a near 5% last year, which threatened to worsen the affordability crisis that has been dragging home sales and new home construction lower since March of last year. Rising home prices had only exacerbated weakness in residentia