The U.S. economy grew at an annual rate of 3.2% in the first quarter of 2019—much faster than many analysts had expected. However, as I noted when the data were first released, the strong headline figure was attributable to massive inventory accumulation by businesses and sharp cuts in spending on imports. The economy grew at just an annual rate of 1.5% when the effects of inventories and net trade are excluded.
The latest data suggest the economy is converging to that slower underlying growth rate. That would be a far cry from recession, but it would also be much slower than the 3% growth recorded in 2018 on the back of tax cuts and a boom in military spending.
On Wednesday, the Federal Reserve released its initial estimate of industrial production for the month of April, as well as revised estimates for January, February, and March. The data cover output, investment, and capacity utilization for manufacturing, mining, and utilities. These sectors account for a small share of the overall U.S. economy, but they are strongly associated with changes in the state of the business cycle. Moreover, workers in these sectors tend to be better paid than the average American wage earner.
Since December, overall industrial output has dropped 1.2%. That figure, however, is flattered by the increase in oil prices since the end of last year. Exclude energy, and industrial production is down 1.7%. Production of durable goods, which tend to be more valuable than nondurable goods such as packaged foods or textiles, is down 2.3%. For motor vehicles, machinery, and electrical equipment, output is down about 5%. Semiconductor and aerospace output have held up the best by staying flat. So far, the situation is about half as bad as during the manufacturing recession of 2014-16.
Also on Wednesday, the U.S. Census released its latest estimates of retail spending through April. The data present a bit of a mixed picture, especially in light of the latest report on overall consumer spending published by the Bureau of Economic Analysis (which only goes through March). In dollar terms, retail spending growth excluding gasoline remains weaker than at any point since the 2007-09 recession.
By contrast, the BEA’s estimate of real consumer spending looks much healthier because it estimates consumer prices have grown more slowly than in the past. If the slow pace of inflation persists, that could create problems for the Fed under its current operating framework. If inflation accelerates, then the question is whether retail spending will follow suit.
Finally, consider the latest report on the number of Americans filing claims for unemployment benefits, which was released Thursday. For years, claims steadily fell as the economy gradually improved after the end of the recession. By the end of last summer, however, this trend had gone into reverse. That was consistent with other data indicating a slowing economy, most obviously the retail sales numbers. Things seemed to have begun improving by February, though, and the number of unemployment benefit claims hit a new low by mid-April. The situation has deteriorated markedly since then.
It is important not to overstate the magnitude of this move, which is tiny compared with anything observed during an outright recession. However, the latest data are consistent with other indications that growth rates have slowed.
The BEA will release its next estimate of consumer spending on May 31. The Fed and the Census will release their next estimates of industrial production and retail sales on June 14.
Write to Matthew C. Klein at matthew.klein@barrons.com