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Reuters/Eric Gaillard
The rush is over.
BITTER YIELD

The US economy is coming down from a sugar high. How bad will the headache be?

By Gwynn Guilford

A few days ago, Donald Trump tweeted a characteristically all-caps boast that was uncharacteristically accurate:

For a while, anyway.

Revisions to fourth-quarter GDP announced today show the US economy grew by only 2.2% in the quarter, down from the previous estimate of 2.6%. That revision pulled down the year-over-year rate, too. It now turns out that the US economy expanded only 2.9% in 2018.

That’s still its fastest pace since 2015, but not quite as awesome as the president proclaimed.

In other words, the pace of growth is slowing more sharply than we originally thought.

That, in itself, isn’t surprising. “The slowdown in GDP growth, from 3.4% in the third quarter, is a straightforward story about the end of the kick from tax cuts, which was never going to last long,” said Ian Shepherdson, an economist at Pantheon Macroeconomics. Along with a big boost in government spending, those tax cuts acted like a “sugar high”—a short-lived, empty-calorie rush that inevitably comes with a crash.

Although we knew a comedown was in store, the fourth-quarter revision suggests that the sugar crash is maybe a little harsher than expected.

In addition to a revised estimate of government spending, pretty much every other component of GDP was notched down—in particular, consumer spending and business investment. “The only consolation for GDP came from weaker imports growth at 2.0% (down 0.7%),” noted Gregory Daco, chief US economist at Oxford Economics, adding that “even that likely reflects a weaker pull from softer domestic activity.”

The more sluggish pace of fourth-quarter GDP growth falls in line with more recent gloomy economic news, including softening consumer spending and anemic inflation growth. Economists, as a result, are turning more pessimistic. Notably, last week Federal Reserve officials downgraded their forecast for 2019 growth to a so-so 2.1%. (The White House, as always, remains much more optimistic.)

On top of all that, the US Treasury yield curve—whose shape investors see as a reliable harbinger of recession—is flashing a warning sign. Last week, the yield on the 10-year Treasury slipped below the 3-month government bond: a dreaded “inversion” that some believe means a recession is imminent.

But it’s probably not time to start panicking just yet.

As Quartz’s Allison Schrager has explained, it’s best to have a firm grip on a salt-shaker when taking in news about the implications of an inverted yield curve. First off, it depends which parts of the curve are inverted: the San Francisco Fed analysis most often cited on the matter analyzes the difference between 10-year and 1-year Treasury yields.

Plus, yield curves invert for different reasons. Unlike the forces pushing up short-term yields, those driving down long-term yields can be fairly benign—even though both can result in an inversion. As economist Mohamed El-Erian points out (paywall), there are few signs of imminent recession elsewhere in the US economy—and even in the rest of the bond market.

Still, by inflaming fears of recession, yield-curve hysteria in itself could hasten a slowdown, warns El-Erian. Unfortunately, the worse-than-expected news about US economic performance could raise that risk.