U.S. GDP Could Get Hammered

February is half over, and we’re that much closer to spring.

As far as the markets go, this past week has been driven by a lackluster set of new economic data and heightened concerns about whether the coronavirus is contained or not, whether the Chinese have downplayed the figures or not and what the real economic impact in China and around the world might be.

But we could already be feeling the effects here at home…

The latest information reveals that consumer spending dropped substantially in January. And core retail sales dropped off.

Clothing sales, for example, dropped 3.1% last month. That’s the largest month-over-month decline since March 2009.

U.S. factory output also slackened. Manufacturing output slipped 0.1% from December, mostly due to Boeing’s ongoing production halt for the 737 Max.

Export demand is also a source of concern, as the coronavirus could affect critical supply chains and hamper demand in the weeks and months ahead.

Meanwhile, weak corporate investment could also put a drag on growth.

All these factors may combine to put a big dent in this quarter’s growth…

A new CNBC survey of 11 economists projects that first-quarter 2020 GDP growth will drop dramatically to 1.2%, far below the 2.1% rate from Q4 2019.

A Bloomberg survey is somewhat better, but not much. These economists project a 1.5% growth rate.

While these numbers are weak, economists surveyed by Bloomberg don’t believe the Fed will be cutting rates soon. But they do believe the drop-off in personal consumption makes the economy vulnerable to “exogenous shocks”:

While the economic outlook remains strong enough for the Fed to keep interest rates on hold, personal consumption moderating from last year’s robust pace makes the economy vulnerable to exogenous shocks, such as the halt in production at Boeing and potential supply chain disruptions stemming from the coronavirus.

Since consumer spending is about 70% of GDP, a downturn in spending could hit the U.S. economy hard.

Federal Reserve Chairman Jerome Powell spoke at his regularly scheduled testimony before Congress this week.

What did he have to say?

The upshot was he reconfirmed the fact that the coronavirus would have an economic impact, but it was too soon to tell the extent of it. So he left it as an excuse, in my opinion, to ease policy if needed down the road.

If the coronavirus threat continues into the second quarter and beyond, he may not have a choice.

What about the ongoing trouble in the “repo” market?

When you add up all the Fed’s support for the “repo” market since September, it comes to over $6.6 trillion.

When pressed by Congress about whether he saw financial risks in the banking system, he pointed to how well the Fed’s bank stress tests have been working.

That’s great, but it seems the liquidity issues are getting worse, not better. The Fed’s latest repo operations were three times oversubscribed, meaning the demand for fresh funding in the repo market far exceeded the supply.

Although the Fed won’t make the information publicly available, the ongoing problems suggest that one or more trading houses on Wall Street are having problems.

The Fed has basically said these loans will continue “at least” through April. But they could continue longer. At the going rate, total loans would reach $29 trillion by the middle of the year.

That would equal the $29 trillion bailout the Fed handed out between 2007 and 2010.

When you add everything up, the economic effects from the coronavirus coupled with ongoing problems in the repo market, things can get really shaky this year.

Regards,

Nomi Prins
for The Daily Reckoning