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Tuesday, April 20, 2021

Sightings of a Slowdown? Some Insight on the Outlook

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The percentage change in major categories of retail sales for September. Original graphic: To view full graphic of selected categories, click here.

Economic growth in the fourth quarter of 2018 will “pick up the pace a bit,” said Dale Mortensen, head of economic research at Pepperdine University’s Graziadio School of Business and Management. “This will give a little more confidence that we’re going to get the next 1½ to 2 percent GDP.”

After gaining momentum in the third quarter, the economy is getting closer to the high of 2.9 percent that it averaged in 2017, the strongest growth in years. When Mr. Mortensen started researching the potential for growth in the next quarter, he had low expectations: “I thought that it was more just dead in the water until we hit the halfway point,” he said. But a strong payrolls report for September led him to revise that assessment.

It’s also encouraging to see a flattening out of the month-to-month changes in retail sales, something investors have also been looking for, Mr. Mortensen said. The monthly changes have been especially volatile in the past year.

An improving economy, combined with higher energy prices, may be spurring some interest-rate watchers to predict the next rate increase, and Mr. Mortensen says the Fed should stay put. Although the economy is doing well, he said, consumers are still cautious about borrowing, and it would be a mistake to raise rates too soon.

Another source of additional optimism is the appetite of students for college, and that was reflected in data on homebuilding, mortgage lending and the housing market for September. Home prices were essentially flat in September, only the fourth month in 2018 that home prices were essentially flat.

Mortgage borrowing, which last year set a record for the fifth year in a row, seems to be leveling off, with the percentage change in outstanding mortgage debt being the second-lowest this year. Even so, higher levels of mortgage loan activity do “suggest some kind of demand from people,” Mr. Mortensen said.

A reversal of the previous pattern, however, has resulted in another month of disappointing overall auto sales, which were down 2.5 percent in September compared with a year earlier.

A year ago, the decline was 8.1 percent. However, there are other factors going into the drop in new vehicle sales. “Prices are rising,” Mr. Mortensen said. “Historically they have trended up every year for the last 25 years, so that’s partly what’s keeping people from buying cars.”

He said a small bump in gas prices is also another factor in slowing sales. Prices started to rebound at the end of last year and have started to trend up again this year.

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