United States Forecast Summary
Economic data so far this year seem determined to induce a major case of cognitive dissonance. Data for the first quarter, particularly that for GDP and its components, ranged from okay to terrible. Monthly indicators during the second quarter have ranged from okay to very good. Our model thinks the latter are a better guide to the rest of this year and into 2015.
The second set of revisions to the first quarter National Income and Product Account (NIPA) data were similar to the initial revisions in one regard, but different in another. And both the similarity and the difference raise concerns.
The similarity is that the main changes were in a negative direction. For instance, total output growth, already lowered from +0.1% to -1.0%, was reduced to -2.9%. The difference concerns the sources of the revisions. A month ago much of the downward change was due to slower inventory accumulation. This time the reductions came from decrease in actual purchases by households and the foreign sector. Growth in consumption dropped from a healthy 3.1% to a worrisome 1.0%. Most of the change was in a lower estimate of expenditures on health care. Apparently a surge expected from the inception of the Affordable Care Act has not materialized. On the international front exports, which had been put at -6.0%, were lowered to -8.9%. Weather may explain part of this dismal number, but certainly not all. Estimate revisions for business investment, residential investment, and government purchase were positive, but small. And each of these components was and remained in negative territory.
In other words, the only growing piece of first quarter GDP was consumption, and it grew at a rate substantially below its recent (relatively weak) norm. These are not results that engender confidence about the future.
Recent Monthly Data
If the first quarter NIPA data suggest an economy heading back into recession, monthly indicators for the second quarter point in the opposite direction. The most significant of these are from the labor market. Payroll employment has risen by above 200 thousand in each of the past five months. The average for the three months of the second quarter was 272 thousand, including 288 thousand in June. The household survey is equally upbeat with the unemployment rate falling from 6.7% in March to just 6.1% last month. These data are totally inconsistent with an economy that is shifting into reverse or even into neutral.
Pessimists pointed out that many of the new jobs were in sectors characterized by low wages. And indeed, income growth has been relatively weak in recent months. Also industrial production dropped in April after two positive months.
The same applies to other monthly data as well: Real after-tax income has risen at a 3% annual rate so far this year. Industrial production is up at a 5%% rate. Auto sales averaged a 16.5 million rate for the three months of Q2, with a 17.0 million reading in June. Housing starts were back above a 1 million rate in both April and May. The ISM indices the past three months have both been indicating strong expansion with readings around or above 55.
Given all this confusion, our model has become a little less optimistic about output growth for both the second quarter and the second half of 2014. For the second quarter we now put growth at 3.2% (including 0.5%) from inventory accumulation). This is down 0.5% from a month ago. For the rest of 2014 we now expect growth average 2.8%, slightly lower than our June outlook. All of the change is due to a reduced estimate of consumer spending growth. Our outlook for next year has output growth at 2.9%, slightly above a month ago.
Even though near term growth has been dialed back a little, our current outlook still has the economy picking up momentum its pattern of the past three years. The key to this long hoped for result is some pick-up in business investment, especially in equipment. Given a tighter labor market, this is not an unreasonable expectation. But it is not yet a reality either.