Strong output and moderate inflation to start 2019, observes IHS Markit analysts

In its “U.S. Economic Forecast Flash,” IHS Markit analysts note that first-quarter GDP growth was impressive, but cautions supply chain managers to remain on guard. It was reported at 3.2% in the Bureau of Economic Analysis’s (BEA’s) advance estimate, up from 2.2% in the fourth quarter of last year and in line with the 3.0% rate of increase averaged over the four quarters of last year.

“The robust first-quarter pace, though, is expected to be temporary, as it comprises two sources of strength that could easily reverse in the second quarter: inventory investment and net exports,” says Chief U.S. Economist Joel Prakken.

Both components are volatile and rarely indicative of underlying momentum in the economy. Indeed, final sales to private domestic purchasers decelerated in the first quarter to the slowest rate of increase in nearly six years (1.3%).

“We expect GDP growth to moderate beginning in the second quarter, and we look for 2.4% growth averaged over the four quarters of this year,” observed IHS Markit executive director, Patrick Newport. “Core consumer price inflation (based on the personal consumption expenditure, or PCE, index) slowed in the first quarter, rising at only a 1.3% annual rate sequentially (from the fourth quarter) and 1.7% from the first quarter of last year.”

The first-quarter reading was held down by sharp declines in a few prices that we believe will not repeat, and this forecast shows annualized sequential core PCE inflation rising quickly to above 2.0%.

“This, combined with further declines in the unemployment this year, supports our expectation for one more Fed rate hike this year,” concluded IHS Markit executive director, Ben Herzon “Equity values have fully recovered from their late 2018 swoon and are expected to continue rising, albeit at a moderating pace, over the next several years.”