The Inversion

May Political Resolutions Trump all this Drama 

The Mueller investigation against President Trump concluded that neither Trump nor his campaign conspired with the Russian government and Attorney General William Barr concluded the evidence wasn’t sufficient to establish that Trump committed a crime. While “Keep America Great” tweets from the White House flooded news cycles early this week, political drama was unfolding across the pond as the UK Parliament was considering Theresa May’s third Brexit vote, which was defeated on Friday. Apparently third time May not, in fact, be a charm. Britain was given until May 22 to leave the EU, but with the Brexit deal voted down, the new cut-off is April 12. 

Moral of the story: Never-ending political uncertainty seems to be the name of the game, and it’s definitely doing its job of destabilizing global growth. While the drama continues in the UK, the conclusion of the Mueller investigation should give the Trump administration a renewed level of focus on further tax cuts and business deregulation, the infrastructure plan, and finalizing a trade deal with China (we saw the January trade deficit narrow more than expected, which is good news for Q1 GDP, and China accounted for a good bit of it). 

Beginning of the End?

Fourth quarter GDP was revised downward from the prior estimate of 2.6% to 2.2%. The revision was driven by downward revisions to consumer spending, state and local government spending, and nonresidential fixed investment. This 2.2% increase is a stark deceleration compared to the 3.4% we saw in the third quarter and probably indicative of the rate we can expect for the first quarter. Corporate profits in the fourth quarter also dropped $9.7B, compared to the $78.2B increase in the third quarter. Yikes. Despite the quarterly GDP revision, full year GDP was left unchanged at 2.9%, which is still a great print and tied for the best year of the current cycle.  

Moral of the story: Last year’s GDP saw a massive one-time boost from the new tax law that put more cash in the pockets of companies and consumers, driving big increases in consumption. Data from the end of the year is indicative of a pretty dramatic slowdown in economic activity and suggests a challenging start to the beginning of this year.  

Apparently We Stopped Spending Money… 

The January & (partial) February personal income and outlays numbers were released on Friday and showed personal income decreased .10% in January but increased 0.2% in February. Consumer spending, however, came in below expectations for January, creeping up only 0.1% on the heels of the December number, which was revised downward to -0.6% (from -0.5%). This report also showed slack in inflation as the PCE Index dropped to 1.8%, falling below the Fed’s 2% target. 

Moral of the story: Consumption accounts for about two thirds of our GDP and this adds to the slew of data pointing to a pretty dramatic slowdown in economic growth for the beginning of this year. This year, we’re not only comparing growth off the high levels in 2018 (3%+ in 2Q18 and 3Q18), but also doing so in the midst of slowing global growth. As of now, estimates for GDP growth for the first quarter are as low as 0.9%, continuing the downward trend since last summer.