United States Forecast Summary
Incoming economic news during the past month has been mostly positive. This has reinforced our belief that the U.S. economy has broken out of its long post-recession period of subpar performance. It has also strengthened our expectation that there will be further acceleration during the upcoming year.
The second release of the third quarter National Income and Product Account (NIPA) data were generally positive, but especially with regard to private domestic demand. Real GDP growth was raised by 0.4% to 3.9%. All of the increase and then some was from the private domestic sector. The estimate for consumption growth went up 0.4% to 2.2%. Growth in business investment was raised from 7.3% to 8.7% and in residential investment from 1.9% to 2.7%. These positive changes were partly offset by downward adjustments in government spending and in exports.
Overall we are encouraged by the third quarter numbers. The core elements of the domestic economy were solid but without any hint of unsustainable exuberance. We remain optimistic about the near-term outlook.
Recent Monthly Data
Monthly indicators mostly reinforce this optimism. Consumption in October was consistent with its pattern in the second and third quarters – growth roughly in line with after-tax income at a 2%+ annual rate. Consumer confidence was down slightly in November, but auto sales jumped back above a 17 million annual rate. The ongoing decline in gasoline prices will add significantly to household discretionary income. This could add about 0.5% to real consumption over the next several quarters.
Industrial production declined a little in October after a large September increase. The ISM non-manufacturing index fell very slightly in November, but their manufacturing index was up over two points. Both indices remain at high levels. Housing continues to be disappointing, however. Both housing starts and building permits were above one million in October, but that represents little improvement over the past year.
Finally, the employment report for November was very strong. Payrolls rose by 321 thousand, with an additional 44 thousand from positive revisions to the previous two months. There were increases in every major category, including solid advances in “good” jobs (for example, manufacturing, construction, professional and business services). Average weekly earnings had a solid increase. In the household survey the unemployment rate was reported to be unchanged at 5.8%. In fact the rate went up slightly from just below to just above the reported rate. The labor force rose by 119 thousand, and the participation rate was unchanged. There was good news elsewhere in the household report. The number of long-term unemployed (27 weeks and over) continued to decline. At 2.8 million it is still high, but the current level is down from over 4 million a year ago. Finally, the number of those who were working part time but would rather be full time fell by 177 thousand in November.
The data reviewed above have had a positive impact on our forecast. Our model now puts growth in the current quarter at 2.7%, up from 2.4% in our November outlook. For all of 2015 we now show real output growing by 3.2%, which is 0.1% higher than a month ago. We are also more optimistic about the labor market showing employment increases averaging nearly 250 thousand per month through the end of 2015, over 20 thousand above our November estimate.
We think our baseline forecast may have a slight upside bias. In particular it contains growth in consumption and in housing that is above the recent norm. In addition, it shows some continuing reduction in the trade deficit. While consistent with recent experience, this expectation for trade could be problematic given the weakness in most of our export markets. At the same time, the U.S. economy currently has no major imbalances, and the growth in our forecast is below that for the past two quarters even adjusting for some weather rebound in the second quarter.