United States Forecast Summary
Economic data for August and September have been a good news–bad news story. The good news is that there is very little evidence to suggest that the economy is decelerating. The bad news is that there is very little evidence that the economy is accelerating to any great extent. This situation leaves us comfortable with our view that going forward we will see continuing recovery with modest improvement on the pattern of the past three years.
The third release of the second quarter National Income and Product Account (NIPA) data were generally similar to, but slightly higher than, the second estimates. GDP growth was raised by 0.4% to 4.6%. At a disaggregate level growth in every major component of aggregate demand was raised. Most of the changes were small, although business investment in structures was increased to growth of 12.6% (from 9.5%). The basic pattern of growth remained unchanged: Business investment was very strong (up 9.7%), as was housing (+8.8%). International trade bounced back from first quarter weakness. Consumption was adequate, with goods purchases strong and services weak. Government spending growth was weak, which is better than the declines of the past four years.
Overall we are encouraged by the second quarter. We have long felt that there are two prerequisites if the economy is to break out from its three-year pattern of 2% +/- growth. These are an increase in business investment and at least some positive contribution from government. Both of these were present in Q2.
Recent Monthly Data
Monthly indicators are consistent with our guarded optimism. The employment report for September was good, but pretty much in line with the situation going back to last spring. Payrolls rose by 248 thousand, with significant positive revisions to the previous two months. The unemployment rate fell to 5.9%. While this is its lowest since 2008, the decrease was just a continuation of the one tick per month decline that has held since the beginning of 2013. It also continued the pattern of lower unemployment due in part to weak labor force participation. Bottom line: the labor market has improved relative to two or three years ago, and arguably relative to a year ago, but the improvement is far from extraordinary.
Most other indicators the past month have been a little wishy-washy – that is, not great, but not really bad either. Consumer sentiment, for example fell some in September (understandable with beheadings on the internet) but remains at levels comparable to most of the past year. In addition to the labor market this probably reflects continuing growth in household income. Housing starts and permits were both down in August, but that followed strong gains in July. The sector remains stuck in a range of around a million units per year. Auto sales, which surged to a 17.5 million rate in August, fell back in September but just to their recent norm in the mid-16 millions. Like the housing numbers, this is not great, but not bad either. Both ISM indices fell in September but they remain in the upper 50s, which indicates solid expansion.
There is nothing very surprising in the data reviewed above, and consequently nothing to change our outlook in any significant way. We continue to expect the next year to produce growth averaging above the recent range. Our model puts the just completed third quarter at 2.9% and the current quarter at 3.1%. Growth for 2015 averages 2.9%. Compared with the past three years the improvement comes from stronger business investment and weak growth in the government sector (compared with contraction). It has consumption and housing growth similar to their recent performance. The trade balance shows little change, which is also similar to the past three years.
There is both potential upside and downside to our baseline forecast. On the positive side, the improvement in business investment we expect is modest – nothing like a boom. Similarly, our forecast for consumer spending could be conservative. On the other hand, the shift we expect in business spending and from government is not yet a fact. The second quarter increases could prove to be transitory, returning growth to the levels that are now familiar.