United States Forecast Summary
The economic outlook has brightened noticeably during the past month. To begin with, as we expected, it is now clear that the government shutdown had minimal impact on the economy. In addition the pattern of year-end strength in economic data has been repeating for the fourth year in a row. On the other hand, there has been only a little change from a month ago in our forecast, and that has been toward less optimism.
The second release of the third quarter NIPA data was little different from the advance release, with a couple of notable exceptions. Growth in real GDP was raised substantially – from 2.8% to 3.6% – but all of the change and then some came from higher inventory accumulation. The estimate of final sales was actually lowered by 0.1%. The inventory number was the largest increase since 1998. Among other components there was a significant positive adjustment to equipment investment offset by negative changes in consumption and the trade balance. Overall the new data extend the pattern of the past three years – weak private sector demand outside the housing sector, with government and international trade close to zero.
Monthly data released during November were mostly constructive. In the not so good column were consumer confidence (down for the third straight month in November) and October disposable income, which declined due mainly to a drop in farm income. But numbers for October on consumption, building permits, and industrial production were all solid. November auto sales were at a very strong 16.4 million rate, and the ISM manufacturing index for November rose for the fourth consecutive month to a 57.3 reading. Finally, the November employment report was very good. Payroll employment rose by 203 thousand, the best number since February. There were significant gains in manufacturing (27k), professional and business services (35k), transportation and warehousing (31k), and health care (30k). The household survey is harder to figure out due to distortions from the government shutdown. In October it showed very large decreases in both employment and in the labor force, which were reversed in November. Over the two months combined employment was up and the labor force was down. For unemployment this produced a decrease to 7.0%, the lowest level in five years.
All this is consistent with our view since early this year that the economy will continue to show slow growth as 2013 grinds to a close and into early 2014. Our forecast for GDP growth in the current quarter has weakened significantly from last month – from 1.9% to just 1.2%. But all of the change is due to a larger decrease in inventory accumulation. Our expectation for final sales is actually marginally higher. We expect sluggish growth to continue into the first part of next year due to weakness in government demand and also to some deceleration in the housing sector. After that our model produces quite steady growth at a little below 3%. The current growth outlook is marginally below that in our November forecast primarily due to slightly weaker spending by consumers.
Our near term outlook is not champagne and roses, but also not doom and gloom. We think that household and business spending will become gradually stronger during 2014. This will be enough to balance some slow down in housing yielding total growth close to the underlying potential of the economy.