Strong surveys at odds with slowing growth

The incoming monthly activity data suggest that GDP growth has slowed from 2.6% annualised in the fourth quarter to only around 1.5% in the first. At the same time, however, the business surveys have remained relatively upbeat, with a weighted average of the ISM activity surveys consistent with GDP growth accelerating above 4% annualised. It’s clearly possible that growth picks up again in the second quarter. The rebound in consumer confidence suggests that consumption will continue to recover from the plunge in December, while a potential trade deal with China could give a temporary lift to exports. But with the fiscal boost having faded, and the continued slowdown in durables consumption and housing activity suggesting that higher interest rates are taking a heavier toll, a sustained recovery looks unlikely. We expect GDP growth to remain below its 2% potential pace this year, ruling out any further rate hikes from the Fed and ensuring that market expectations of rate cuts will continue to grow.