United States Forecast Summary
"Plus ça change, plus c'est la même chose" – The more things change, the more they stay the same. Alphonse Karr’s epigram is certainly an apt characterization of the economy at present. Positive news is followed by bad followed by better followed by not so good. But in the end the recovery continues, unenthusiastic, but with a bare hint of acceleration.
The second set of revisions to the first quarter data were mostly inconsequential with a slightly positive bias. Consumption spending was upgraded a little, as was business investment. Growth in the former is now put at 2.1%, while the latter now shows a decline of -1.6%. The previous values were 1.8% and -2.5%, respectively. Housing had a significant positive revision from 4.9% to a quite respectable 6.4%. The decline in government spending was reduced, while the trade balance was little changed. The net impact was to raise output “growth” from -0.7% to -0.2%.
Recent Monthly Data
Monthly indicators continue to provide support for optimists, pessimists, and those in between.
The employment report for June provides an illustration. The bottom line was an increase in payroll employment of 223 thousand, which is about in line with recent numbers. But negative revisions to April and May reduced the net increase to a relatively weak 163 thousand. Also in the establishment survey average earnings were flat in June, showing no follow-through after a solid increase in May. In the household survey unemployment dropped two ticks to just 5.3%, the lowest since April 2008. But the decrease was again due to reduced participation rather than rising employment. The participation rate fell to 62.6%, its lowest level in almost four decades. This survey also showed a large increase in part time workers.
Other data show a similar mild schizophrenia. Consumption spending was solid in May, and consumer sentiment, down in April and flat in May, increased in June. Auto sales were robust again in June after a very strong May. They have averaged above a 17 million annual rate over the past four months. Housing starts fell off in May from a weather related catch-up in April. The industrial economy continues to struggle. Industrial production was down in May. The index has not had a positive month since last November. The manufacturing sector index was also down in May, its fourth decrease in the past six months. On a more hopeful not, the ISM manufacturing index was up in both May and June.
The new data have had little impact on our forecast. We continue to see the economy muddling through the rest of this year, followed by modest improvement in 2016. Our model now puts the just completed second quarter at 2.6%, up from 2.3% a month ago. The modest improvement comes mostly from a stronger outlook for consumption, with an assist from business and residential investment. For the second half of this year we expect growth of 2.4%, followed by 2.8% in 2016. The second half forecast is slightly weaker than last month, while that for 2016 is slightly stronger. In both cases the change reflects a similar pattern for consumer spending. One further note: We have readjusted our assumption about when the Fed will begin to “normalize” interest rates, moving the first move forward from December to September. In our model, the change has little impact on the economy.
In our view, the U.S. economy has no driver that could propel it toward significantly improved growth performance. At the same time, there are no major imbalances (perhaps excepting some financial markets) that could trigger a recession in the near term. A major international shock could cause trouble, however. As this is written the Greek drama seems to be headed for a climax. For the Greeks the outcome seems likely to be unpleasant. For the rest of the EU there may be some financial instability. For the U.S. it seems unlikely to matter much. The slowdown in China could be more serious. The latest moves by Chinese monetary authorities seem to us to contain a hint of panic. Stay tuned.