Domestic weakness adds to global concerns

With the global outlook continuing to darken, the US had until recently remained a relative bright spot. But the latest data suggest that outperformance may have been short-lived. January’s drop in manufacturing output, led by weaker auto production, suggests that the US is succumbing to the global industrial slowdown. Furthermore, the 1.7% m/m slump in underlying retail sales in December means that the domestic economy entered 2019 on a much weaker footing than we had previously anticipated. We now think that fourth-quarter GDP growth was 2.5% annualised, down from our previous estimate of 3.1%. Even if retail sales rebounded in January, real consumption growth will slow sharply in the first quarter and GDP growth could fall below its 2% potential pace. In that environment, the Fed won’t be hiking interest rates any time soon. But with domestic and external headwinds growing, a pause in monetary tightening will not prevent a more profound economic slowdown over the course of this year. That will cause the Fed to begin cutting interest rates in 2020.