- Economic growth in the U.S. has slowed more than we expected, but the ingredients for a recession are not in place.
- The Fed’s more dovish stance is supportive for risk assets.
- We still see reasons for caution despite the strong market recovery in Q1.
Going into the second quarter, we see more question marks about the direction of the economy, but we do not think the ingredients for a recession are in place yet. The economy entered 2019 in a position of strength despite high market volatility in the fourth quarter. Real GDP grew nearly 3 percent in 2018, and unemployment ended the year near a 50-year low. While we expected the economy to decelerate in the first quarter given slowing growth in the rest of the world and a fading boost from tax reform, the economy appears to be somewhat weaker than we anticipated. Consensus estimates for first quarter GDP growth declined from 2.3 percent at the beginning of the year to 1.5 percent today according to economists surveyed by Bloomberg. Earnings estimates have come down as well. While FactSet reports that analysts expect solid revenue growth in the quarter, margin pressure is likely to reduce earnings to below a year ago. Weak manufacturing activity and a surprisingly cautious consumer are the biggest drivers of lower expectations. However, conditions for the latter remain favorable, and recent data have been more encouraging.