First-quarter slump won’t snowball into something worse, JPMorgan’s Feroli says
The U.S. economy has obviously slowed down from the stimulus-fueled 3%-ish pace of 2018, but the slump is “not snowballing into something worse,” says Michael Feroli, chief U.S. economist at JPMorgan Chase and the winner of the Forecaster of the Month contest for data that was supposed to be released in January.
The economy will stabilize in 2019 into trend-like growth, he forecasts.
The slowdown was predicted by just about everyone, but everyone was caught just a little off-guard by the way it has unfolded. A sharp (and really inexplicable) downturn in retail sales in December is leading forecasters to mechanically cut their forecasts for first-quarter growth, fueling a lot of talk about how this might be the end of the longest expansion in U.S. history.
Feroli doesn’t think it’s quite that dire, although he is reluctant to talk about the “R” word.
“Our profession’s track record at forecasting recessions is not that great,” he says. Putting a lot of effort into calling a recession “is not that productive.”
Recent recessions typically have been preceded by overly restrictive monetary policy by the Federal Reserve, and he doesn’t see much danger of that, now that the Fed has put on hold further increases in its benchmark interest rate.
The fundamentals in the real economy look OK, and he doesn’t see any unexploded bombs lurking in the financial side of the economy, although “you never know for sure.”
Feroli expects the current quarter will be the worst of the year, with growth most likely in the low to mid-1% range. The monthlong government shutdown knocked just enough activity off kilter, at the same time that uncertainty was high about Fed policy, global growth, the trade wars, and a bear market in stocks.
For all of 2019, Feroli expects real gross domestic product to grow around 2%. It’s going to be kind of a meh year, with every sector performing just about at trend. Unemployment and inflation should be little changed. He expects the Fed to raise interest rates in the fourth quarter anyway.
Donald Trump’s policies don’t seem to be as transformative as he promised, or as many believed or feared. It now looks as if there’ll be some kind of modest trade deal with China, defusing a possible trade war.
“We know the administration will accept a deal that doesn’t change things that much, if they can call it a win,” Feroli says.
And the tax cut hasn’t been a game-changer for the economy as promised. The tax cut “lowered the after-tax cost of capital,” Feroli says. However, “the amount it lowered it was not that great. The existing tax code was quite favorable for capex.”
“We never thought it would be transformational,” he says. “The data have been consistent with that.”
In the January contest, Feroli and his colleagues Daniel Silver and Jesse Edgerton had the most accurate forecasts among 44 contestants on four of the 11 indicators we track: New home sales, retail sales, the consumer price index and industrial production. Their forecasts on four others — the ISM index, the trade deficit, housing starts, and durable goods orders — were among the top 10 most accurate.
|Feroli’s forecast||Number as reported*|
|Trade deficit||-$53.3 billion||-$49.3 billion|
|Consumer price index||-0.1%||-0.1%|
|Housing starts||1.240 million||1.078 million|
|Durable goods orders||1.5%||1.2%|
|Consumer confidence index||126.0||120.2|
|New home sales||620,000||621,000|
|*Subject to revisions|
It was the fourth time Feroli has won our monthly contest. Before joining J.P. Morgan in 2006, Feroli was an economist at the Fed.
The runners-up in the December contest were Ward McCarthy of Jefferies, Joerg Angelé of Raiffeisen International Bank, Ryan Sweet of Moody’s Analytics, and Lou Crandall of Wrightson ICAP.
The MarketWatch median consensus published in our Economic Calendar includes the predictions of the 15 forecasters who’ve earned the most points in our contest over the past 12 months, plus the forecast of the most recent winner of the monthly contest. When they differed, the MarketWatch consensus was more accurate than the closely followed Bloomberg consensus 56% of the time in 2018.
Over the past 12 months, these are the forecasters with the highest scores: Joerg Angelé of Raiffeisen Bank International, Christophe Barraud of Market Securities, Jim O’Sullivan of High Frequency Economics, Ryan Sweet of Moody’s Analytics, Michelle Girard’s team at NatWest Markets, Michael Feroli at JPMorgan Chase, Peter Morici of the University of Maryland, Avery Shenfeld’s team at CIBC, Richard Moody of Regions Financial, Brian Wesbury and Bob Stein of First Trust, Douglas Porter’s team at BMO, Spencer Staples of EconAlpha, Lou Crandall at Wrightson ICAP, Seth Carpenter’s team at UBS, and Andrew Hollenhorst at Citigroup.
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