United States Forecast Summary
There has been a lot of unsettling news over the past month. Arranged from unpleasant to awful, an unpalatable set of Presidential candidates has solidified, Brexit has become an impending reality, and there was true horror in Orlando and Dallas. But the news from the U.S. economy has been moderately positive. As a result our forecast is very little different from a month ago.
The third estimate of data for the first quarter was little changed from the numbers a month earlier. Modest upward revisions to the trade balance and for business investment were partly offset by downward changes for consumption and housing. The bottom line was that growth in total overall output went up from 0.8% to 1.1%.
There is nothing in the monthly data to suggest any major deviation from the recent patterns for the economy.
First, the household sector should continue to support minimally acceptable growth. The employment report for June was very strong with a payroll increase of 287 thousand. But that followed a downward revised 11 thousand in May, putting average for the two months (149k) right in line with the 144 thousand in April. While well below the 237 thousand for the second half of 2015, this is still enough to keep incomes growing. Consumption data for April and May indicate that first quarter weakness was reversed in the second quarter. Housing starts for April and May are down a little from their average during Q1, but even if this produces a deceleration residential investment would still show strong growth.
Second, the business sector may be improving a little from a dismal Q1. Both ISM indices rose in June. On the other hand, after depreciating about 7% from a January peak the dollar reversed course following the Brexit vote. That, together with the general uncertainty engendered by the vote and the U.S. election makes it unlikely that we will see any significant resurgence in business investment any time soon.
Third, neither the international nor government sectors is providing any spark. The trade balance is virtually unchanged overt the past year, and given events abroad, we will be doing well to match that over the next year. Government spending is up 1.5% over the same period, again a number that is unlikely to increase much if at all.
Finally, again driven by the UK vote, U.S. interest rates have declined substantially in the past two weeks. The 10-year Treasury rate has hit an all-time low just below 1.37%. The yield curve is getting rather flat, which is traditionally an ominous sign. But in today’s world, who can say.
In any case, all this confusion is having little impact on our forecast. We now put growth in the just completed second quarter at 2.5%, up 0.1% from a month ago. This is followed by two quarters just below 2% and then a slight acceleration in 2017. The details are also little changed: consumption bounces back in Q2 and then falls back to mid-2% growth. This accounts for nearly all of overall GDP growth. Business investment shows growth, but it is weak by historical standards. Housing decelerates, but remains strong for the rest of this year. The recent drop in interest rates, if it is fully reflected in mortgage rates (it isn’t yet) could extend the recent strength in this sector.
For the past few years there has been a rift between the U.S. economy and that in the rest of the world. We have had slow, but very steady growth. Abroad results have ranged from decelerating growth (China) to no growth (Europe and Japan) to recession (commodity producers). Over the past three weeks this divide in the economic landscape has become dramatically more prominent. In the U.S. a set of positive monthly data indicates that the status quo remains in place. Elsewhere, the unexpected UK vote to leave the European Union has ratcheted (downward biased) uncertainty to a new level. Given the ensuing political turmoil in the UK and the complexity involved in actually working out the details of British exit from the Union this uncertainty will not be lessened any time soon. A new administration in the U.S. has the same effect. Overall, we will be fortunate if the above forecast for the next year and a half is correct.