Fourth-quarter 2019 GDP was 2.1%, a bit above consensus and right on top of trend growth. The GM strike/auto sector was a significant drag; excluding autos, real GDP rose a solid 3%. Importantly, investment growth sagged, with the drop coming from sluggish corporate investment; this sector is likely to be positively affected by the gathering ceasefire in the trade war. For full-year 2019, real GDP was up 2.3% and the personal consumption expenditures (PCE) deflator was 1.8%, just under the Federal Open Market Committee’s (FOMC) 2% target. Inflation may be closing in on an inflection point. PCE inflation was just 1.6% SAAR (seasonally-adjusted annual rate) in 4Q19. Note that as the low first-quarter rate of 1.1% rolls off comparisons become easier — likely an upward move in core PCE inflation.
Even at that, inflation seems tame enough for the FOMC: if the core PCE deflator in 1Q20 rises 2.7% (a ten-year high) we’d still have core PCE at just about 2%. The FOMC’s message last week seemed rather clear — they are staying the course and maintaining monetary policy where it is now. The economy is unlikely to have a growth spurt unless investment turns higher, and unlikely to generate significantly higher inflation on its present track. It looks like a counterpunching Federal Reserve from here, which is good for the economy.
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