United States Forecast Summary
To quote Yogi Berra so far this year is looking a lot like “déjà vu all over again.” A negative first quarter (with special factors), followed by signs of life as spring turns to summer. In 2014 the transformation was dramatic going from -2.1% in Q1 to +3.9% for the rest of the year. We expect this year will follow a similar pattern, but less dramatically so.
The initial set of revisions to first quarter GDP shifted output growth from barely positive (+0.2%) to slightly negative (-0.7%). Most of the change was due to a large upward revision to imports (a negative for GDP). A partial unwinding of the effects of the west coast port strike may have been a factor here. The other significant revisions were offsetting changes within business investment. Equipment spending growth was increased from 0.1% to 2.7%, while the intellectual property category went from 7.8% to 3.6%. [The latter change adding to our impression that estimates for intellectual property investment are close to random numbers.] Residential investment growth was raised from 1.3% to 4.9%. Business investment in structures had a positive revision, but remained abysmal at -20.8%. In addition to the impact of the port strike on the trade numbers, the first quarter picture was distorted by another hard winter in the East and Midwest. This could have affected the consumer spending and the structures numbers. Beyond these distortions, the BEA announced that they have identified some problems in their procedures that have distorted (negatively) reported first quarter data in recent years. Corrections will be forthcoming, perhaps with the annual revisions due in late July.
Recent Monthly Data
Monthly indicators continue to give mixed signals, but recently with an optimistic bias. Data for April were mostly nondescript. A frequent pattern has been weakness in December through February, a strong number for March, and then a return to decrease in April. With some minor differences this applies to real consumption expenditures, new orders for manufactured goods, new orders for non-aircraft capital goods, and the industrial production index for manufacturing. Chalking up the winter weakness partly to weather, and March to a bounce back, the lack of follow-through in April is somewhat disappointing. A variation was housing starts, which followed weakness in February and March with a strong April.
May data look better. Consumer confidence rose a little. So did the ISM manufacturing index (after decreasing in four of the previous five months). May auto sales surged to their highest level since before the Great Recession. Finally, the May employment report was mostly positive. Payroll employment was up 280 thousand from April, with increases in every category except information and mining (the latter due to contraction in oil production). In the household survey unemployment rose to 5.5% from 5.4% in April, but this was due to a large increase in the labor force. The participation rate rose to 62.9%, up from 62.7% in March. Each 0.1% increase in participation represents the return of 250 thousand workers to the labor force.
The new data have had very little impact on our forecast. We now expect the current quarter to come in at 2.3%, up from 1.8% a month ago. The modest improvement comes from somewhat stronger business and residential investment. For the second half of this year we expect growth of 2.5%, followed by 2.7% in 2016. In both cases these outcomes are the same as in our May forecast.
We view our current forecast as a good news/bad news story. The good news is that the economy should be better than bad. The first four years of this “recovery” were bad. Growth has moved up a notch from the 2% level that characterized that period. The bad news is that our outlook is not really good. The fifth year of the recovery was pretty good (growth averaging 3%). We don’t see that continuing for three reasons. First, the tailwind provided by surging oil production has become at least temporarily a headwind, while lower energy prices do not seem to be providing the expected offsetting boost. Second, the strong dollar is putting pressure on the trade balance. Finally, especially in 2016, capacity limits start to come into play.