Final Fourth Quarter GDP Is In

GDP posted a gain of just 2.2 percent in the fourth quarter, the Commerce Department reported yesterday in its final estimate of economic growth. That was down from the previous estimate of 2.6 percent and leaves full-year growth at 2.9 percent.

In all, 2018 was the best year for the economy since 2015 and well above the 2.2 percent increase in 2017. The economy grew 3 percent when compared with the fourth quarter of 2017. If it extends into July, the current economic expansion will then become the longest on record.

The reduction in the fourth quarter GDP number was because of revisions down in consumer spending, government expenditures at the state and national levels, and nonresidential fixed investment. Imports also were revised lower amid continuing tensions between the U.S. and its global trading partners.

Mutual Funds Growing Fast

Mutual funds have been growing strong this year. Net flows added $36.7 billion to mutual fund coffers in January and $29.2 billion in February. Assets rose by 8.6 percent to $14.8 trillion as of the end of February, although that's still below the $15.4 trillion asset level reached in September.

Active mutual funds experienced positive net flows in February for the second month in a row. Total active assets climbed back over the $11 trillion mark in January, and ended February at $11.2 trillion.

ETF assets have also recovered from the fourth-quarter downturn, having risen to $3.72 trillion during February. This was a new all-time high, surpassing the $3.71 trillion amassed in September.

Buybacks at a Record High

The amount of shares repurchased by S&P 500 companies in the last quarter of 2018 reached a record high. The total value surged to $806.4 billion in 2018, up 55 percent from a year earlier, according to new data from S&P Dow Jones Indices. The record was more than 36 percent higher than the previous high-water mark hit in 2007.

This marked the fourth consecutive quarterly all-time high. Many of the biggest companies in America went on shopping sprees for their own shares, including Apple and Oracle Corp., both of which bought back roughly $10 billion worth of stock.

One reason for the record was the slide in global markets late in the year. The fourth quarter’s overall stock price decline permitted companies to buy up even more shares for their dollars.

Another Sign of the Economy Slowing

The National Association of Business Economists is the latest group, joining the Federal Reserve and the Business Roundtable, in downgrading its outlook for U.S. growth this year and next. The 55 business economists who contribute to the NABE outlook survey are now forecasting GDP growth of 2.4 percent this year, down from 2.7 percent previously, and 2 percent growth next year.

Three-quarters of respondents see more downside risks, compared with just 6 percent who see more upside, and a majority blame trade policy and slower global growth for the downside tilt. Nevertheless, NABE economists give low odds for a recession this year — around 20 percent — and just 35 percent odds for a recession in 2020.

The NABE also sees lower inflation on the horizon. They now forecast the Consumer Price Index to be at 2.1 percent throughout 2019, down from the 2.4 percent they had forecast previously.

The Inverted Yield Curve

The big news in the markets is that the yield spread between three-month and 10-year Treasuries fell below zero on Friday for the first time in more than a decade, creating what's known as an inverted yield curve. The 10-year Treasury note yield fell as low as 2.42 percent before closing at 2.45 percent, falling below the three-month T-bill yield at 2.455 percent.

The 3-month/10-year inverted curve is the most reliable signal of future recession, according to researchers at the San Francisco Fed. Inversions of that spread have preceded each of the past seven recessions, including the 2007-2009 contraction. They say it’s offered only two false positives — an inversion in late 1966 and a “very flat” curve in late 1998.

An inverted curve can be a source of concern for a variety of reasons. One reason is that short-term rates could be running high because overly tight monetary policy is slowing the economy. Or it could be that investor worries about future economic growth are stoking demand for safe, long-term Treasurys, pushing down long-term rates.

Mortgage Rates Dropping Again

Some positive news for the housing market: Mortgages rates for home loans are continuing to fall. The 30-year fixed-rate mortgage averaged 4.28 percent in the week of March 21, Freddie Mac said yesterday.

That was down another 0.03 percent from the prior week, putting the 30-year mortgage at a 13-month low. This figure has managed a weekly gain on only two occasions during 2019.

The 15-year adjustable-rate mortgage averaged 3.71 percent, down from 3.76 percent. With the Fed now intent on not raising rates for the remainder of the year, those mortgage rates may stay low for quite some time.

The Fed Puts on the Brakes

The big news from the Federal Reserve: no more interest rate hikes will be coming this year. In a unanimous move, the Fed Open Market Committee yesterday turned significantly from its policy projections just three months earlier: Committee members had estimated in December that two rate hikes would be appropriate in 2019, after four increases in 2018.

The move came alongside reduced expectations in GDP growth and inflation and a bump higher in the unemployment rate outlook. Fed officials now see economic gains of just 2.1 percent this year, down from a 2.3 percent estimate in December, and inflation reaching 1.8 percent, down 0.1 percentage point. The unemployment rate for this year is now seen at 3.7 percent, up 0.2 percentage points from December.

In the statement explaining its decision, the committee said economic activity “has slowed” even though the labor market remains “strong.” More specifically, the statement said “recent indicators point to slower growth of household spending and business fixed investment in the first quarter,” when economic growth is expected to be modest.