United States Forecast Summary
The past month saw a string of unexpected developments, both positive and negative. Simplifying somewhat, the negative news was mostly international, and the positives were domestic. The result for our near-term outlook is essentially a wash, perhaps with a slight downside bias.
The first set of revisions to the second quarter data were one of the positives. Growth in the quarter was revised significantly upward, going from 2.3% to 3.7%, with every sector contributing to the improvement. The largest changes were for the various components of investment. Business investment (total purchases of equipment, intellectual property, and structures) went from a 0.6% decline to a 3.2% increase. Residential investment was raised to 7.8% from 6.6%. In addition there was a large increase in the estimate of government expenditures and a smaller increase in consumption focused on purchases of goods. Finally, and less encouraging, inventory accumulation was higher than initially estimated. But overall the revisions mean that the second quarter was quite strong, certainly more than offsetting the first quarter weakness.
Recent Monthly Data
Monthly indicators also have been positive, although less so than the GDP revisions. Income and consumption both had solid gains in July. Consumer sentiment, which fell in July, bounced back in August. Auto sales followed a strong July with an even stronger August. The annual rate of 17.8 million in August was the highest in over a decade. Housing also showed solid results. July starts were at a 1.2 million rate for the third month in the past four. Building permits fell off significantly, but were distorted by the expiration of a subsidy program in New York that pushed up June permits at the expense of July. On the business side, industrial production registered a strong July but that followed very weak numbers for the previous seven months. Both ISM indices dropped in August. Their non-manufacturing measure remains quite high, while the manufacturing index remains in the positive range but not by much.
Finally, the employment report for August was a little disappointing although not entirely. Total nonfarm employment increased just 173 thousand well below the 218 thousand average for the first seven months of 2015. Private sector jobs rose only 140 thousand (compared with an average of 209 thousand year-to-date through July). More positively, employment for June and July was revised upward by 44 thousand. The establishment survey also showed increases in both average weekly hours and in the average hourly wage, which combined to produce a 0.7% monthly increase in aggregate payrolls. The household survey put the unemployment rate down two ticks to just 5.1%. This was partly due to another decrease in the labor force, although employment was up by 196 thousand.
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 current quarter at 2.0%, down from 2.2% a month ago. But the change is entirely due to a decrease in our estimate for inventories. Leaving out inventories, we have third quarter final sales rising 2.8%. This is 0.4% above last month.
Above we ignored the pink elephant that has wandered onto the economic stage. This is, of course, the downward biased instability that has engulfed financial markets. Since we have been saying for some time that the U.S. economy has no serious imbalances except in the financial sector, this instability is not a complete surprise. The impetus seems to be worries partly about problems abroad (especially in China) and partly about the Fed possibly raising interest rates. Our forecast assumes that the Fed will raise rates next week. But this has little impact on our forecast because we do not incorporate any financial market adjustment in reaction (for example, a significant further decline in equity markets). There is no precedent for seven years with interest rates near zero, and consequently there is little basis for predicting what happens as the Fed reverses course (as it must). But the uncertainty surrounding our forecast is clearly higher than normal, and the risks are on the downside.