United States Forecast Summary
Prior to the first Friday in June the economic data during May were a more or less balanced mixture of moderate positives and negatives. Then the employment report tilted the balance dramatically toward the latter. The result for our forecast is a stronger current quarter, but a slightly weaker outlook for the following year.
The second estimate of data for the first quarter had only marginal changes from the advance numbers. Slightly less deterioration in the trade deficit and stronger growth in residential investment resulted in an increase in real GDP growth from 0.5% to 0.8%. On the negative side the decrease in business investment was increased to -6.2% from -5.8%. The net is that a very weak quarter remains weak; business investment and the trade sector still appear as drags on growth; what life there is rests on consumption and housing construction.
Recent Monthly Data
Monthly data from the second quarter suggest these patterns are still in place, with some possible red flags. Industrial production rose in April, with manufacturing reversing a March decline. Total IP did the same, due partly to a large swing in the utilities sector. From a longer perspective total IP has fallen over the past six months at a 2.1% annual rate, while manufacturing is flat. The ISM shows a similar picture: a slight recent improvement after a weak stretch going back to the end of last year.
Housing starts and building permits both rose in April, but both are slightly below their levels a year ago. Ominously, although weather may be a factor, construction spending in April fell 1.8% from March (monthly rate).
That leaves consumption. April numbers were strong. Nominal retail sales rose 1.3% from March, while total real personal consumption was up over 0.6% (both monthly rates). Auto sales, while clearly off from last fall, are still robust with May sales at a 17.4 million annual rate. So far, so good. But consumer confidence was lower in both April and May. Real disposable income decelerated in April, with its weakest monthly growth in over a year. And then there is the May employment report.
Both surveys contained significant negative surprises. In the establishment survey, employment rose just 38 thousand, with only 25 thousand of that from private payrolls. Further, the increases for March and April were reduced by a total of 59 thousand. In the household survey the participation rate fell 0.2% for the second consecutive month. This raises the uncomfortable possibility that many of those who reentered the labor force over the previous seven months have found their employment prospects disappointing. The participation decline did pull the unemployment rate down from 5.0% to just 4.7%.
There are two caveats. First, one month does not make a trend. The household survey often exhibits very large month-to-month volatility; the establishment survey data is subject to (frequently large) revisions. Second, payroll employment in May was reduced about 35 thousand by the now ended Verizon strike.
In spite of the weak labor market data, as can be seen in the chart, our new forecast has considerably stronger current quarter growth than our May outlook (2.4% vs. 1.4%). The difference comes from a much stronger estimate for consumption, due to the strong April data. But over the following four quarters, the new forecast has growth averaging just 2.0%, more than 0.1% below last month. The difference comes from slightly slower growth in consumption, business investment, and government spending.
Data on April consumer spending was strong; other monthly data have been weak. Our forecast for the current quarter reflects the former. Our forecast for the second half of the year and into 2017 reflects the latter. But not fully. The risks of a recession in the next year have gone up. If data over the next month continue like that from the past three weeks, our basic scenario of an economy in which the household sector supports 2% growth will be in serious jeopardy. If, in particular, the labor market remains as moribund during the summer as it was in May it is hard to see how the household sector will hold things together.