Another ugly first quarter?

The early activity data for January have come in below expectations, raising the possibility that economic growth may once again disappoint in the first quarter. Both industrial production and headline retail sales declined last month, with the latter suggesting that, after a near-4% annualised surge in the fourth quarter of last year, real consumption growth may slow quite sharply in the first. That said, the rapid growth of domestic demand towards the end of last year was always unlikely to be sustained. And the January ISM activity surveys are consistent with GDP growth of more than 4% y/y. Accordingly, for now at least, we still expect first-quarter GDP growth to be between 2.5% and 3.0% annualised. Moreover, with the turmoil in financial markets having eased and mounting evidence that underlying price pressures are starting to build, even a temporary lull in activity growth is unlikely to throw the Fed off course.