Johnson: First Quarter Set to Disappoint, Again

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with our director of economic analysis, Bob Johnson. He thinks that March's data is a wake-up call that GDP in the first quarter is going to be much weaker than many had expected earlier.

Bob, thanks for joining me.

Bob Johnson: It's great to be here today.

Glaser: Let's look at some of the data that's come in for March over the last couple of days. A lot of it has not looked so great, has it?

Johnson: Absolutely not. We look at the retail sales that we got late last week, retail sales were actually down for the month of March led by auto sales and certainly, those numbers on a month-to-month basis looked disappointing. Then we had inflation, which we thought would be off a little bit, but we lost 0.3%. Deflation in the month of March came as another surprise. And then this week we had industrial production out, and after six great months and everybody is like, yeah, we finally nailed this on manufacturing, they give us a little wake-up call, and they shrunk 0.4% in terms of industrial production for manufacturing in the month of March. So, certainly, not good news on the three major indicators there.

Glaser: Let's look at how that's going to impact growth. The Atlanta Fed puts out this GDPNow calculation. How has that trended over the course of the quarter? Where do they think we're going to end up for the first quarter?

Johnson: Yeah, it's a great question. I mean, they started out with their first forecast for this quarter, which is based on data that's already released combined with some trend-line data. So, there's no judgement involved. It's very mechanical process. And they started out thinking they'd grow about 2.3% in the first quarter. The number crept up to 2.5% by the end of February, and has been on a downhill slide ever since. And is now at just 0.5% for the whole quarter. That's annualized quarter-over-quarter growth, which is a very low number.

Glaser: What's the biggest driver of that?

Johnson: Well, the consumer is obviously the really big driver as it usually is because it's 70% of GDP. And what's happened there, the original forecast from GDPNow was that the consumption would grow by 3% in the first quarter, which is in the line, maybe a little bit higher than, what it had been over the last year. And now, they are already down to just growing 0.3%, almost no growth at all. So, clearly, consumption is driving most of the decline. Most of the other categories really haven't changed that much over the quarter.

Glaser: So, with that big decline there was nothing that's picking up the slack--housing or business investment, none of that is making a difference?

Johnson: No, but I will say the one thing that will happen--I've been complaining for a long time that this has been a very unbalanced economy--well, this quarter consumption looks like it will be knocked off its pedestal. It's accounted for almost all of the growth over, say, the last 18 to 12 months. Now, it looks like maybe this month is a horse race between whether business equipment spending or residential investment will kick in the most, but it certainly won't be consumption this quarter.

Glaser: This quarter looks like then it is going to fit this pattern of really weak first quarters that we've seen for a number of years now. Will it turn around? Can we make up for this slow start to the year?

Johnson: You know, we all usually say, oh, we just know it's weather, and the seasonal factors are faulty and it's just going to bounce back in another quarter. But you know what, it just never quite comes all the back. And I think that we're going to have a weak first quarter and it's going to impossible to make it all up. I think even if we grow 2% to 2.5% the rest of the year, it's still when you start out that weak, it's going to be a little bit hard to get to anything much over 2%, which is about where we're at for 2017. But I think a lot of people are going to have to pull in their forecast.

Now, remember, there are quirky things. So, I'm not just kind of rose-colored glasses saying, well, just because they are bad, they automatically have to be good next quarter. There are some very interesting things. Weather-related things always seem to mess us up in many different ways. Apparel sales have been awful. The weather just hasn't been conducive. The seasons and the temperatures haven't fit what lines are in the store, and there is Amazon pressures and a number of things going on that have really complicated the numbers. So, apparel sales affected consumption rather dramatically.

Certainly, with the weather, one of the big things is utility usage flows into consumption, and that was certainly at record lows in January and February. Now, it's bounced a little bit in February. So maybe we are a little bit--oh, maybe consumption won't be so bad, maybe we're a little better in March, I don't think it will be enough to overcome that. But certainly, that weather factor is out there.

And then you've got things like when weather is bad, as it was for a couple of days here and there, you have the issue where it's a hotel room or a restaurant sale that, guess what, if you don't use it on that day--somebody doesn't eat out, another day instead. It isn't like buying a car. OK, it gets late a week I buy it because I couldn't get to the dealership. With a restaurant meal or a hotel room, you don't sell it, it's gone. And some of that data was weak in this report, and that won't be made up. I mean, we'll go up to higher levels than we were, but we're not going to get it back, so to speak.

Glaser: Well, Bob, it sounds like you're predicting that we're going to stay in the slow-growth world?

Johnson: Well, I think, that's true, but remember we've always been in the camp that this isn't going to be a great year for growth. As inflation comes back up to more normal levels--we're not saying it's going to get out of control--but as it comes back to normal levels and wages don't accelerate as much as inflation has and the consumer begins to lose out and you see this slowing consumer spending, I think that's a little bit of what's disguised in some of this data here. And I think that demographics are really driving things, and I think we're looking at 2% growth, at best, as far as the eye can see which isn't an awful deal for consumers; it isn't such a great deal for businesses.

Glaser: Bob, thanks for your thoughts today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.