Setting the stage for a stronger second half
July 16, 2013
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Incoming economic data suggest a resilient U.S. economy, with budget sequestration translating into only a mild temporary setback. A pickup in the pace of business activity is predicted for the second half of the year.
We should note that the Bureau of Economic Analysis will publish benchmark revisions to national income accounts on July 31 along with the advance estimate of second quarter gross domestic product (GDP). Changes in classification and calculation will alter historical levels and quarterly changes of GDP and its sub-components.
Next months edition of the monthly commentary will reflect these revisions to GDP data. Against this backdrop, our current forecast should be seen as a transition forecast. Next months edition of the monthly commentary will reflect these revisions to GDP data.
Key elements of our forecast:
- Second-quarter retail sales excluding autos turned out softer than previously estimated, which suggests a noticeably smaller gain in overall consumer spending compared with the 2.6% increase seen in the first quarter. June auto sales reached a cycle high of 15.9 million units, but the second-quarter average is less impressive. Going forward, recent trends in hiring and earnings numbers support expectations of a pickup in consumer spending during the rest of the year.
- Residential investment continues as one of the strong components of growth. Sales of existing homes advanced to an annualized mark of 5.2 million units, the highest in six years, excluding the brief spurt associated with the first-time home buyer program. The sales momentum of new homes matches the pace seen nearly five years ago. The recent jump in mortgage rates has resulted in only a small decline in the Mortgage Purchase Index. Cash buyers and improving employment conditions are factors that should continue to support growth in the housing sector.
- Business spending has been lackluster, and incoming data continue to point to only small improvements in the second quarter. The favorable cash situation of businesses and projected growth in the economy should give a moderate lift to business spending in the latter half of the year.
- The tepid performance of exports reflects continued soft economic conditions in the eurozone and a deceleration of growth in Canada, Mexico and China the other major trading partners of the United States. Bearish projections of business activity in these countries bode poorly for U.S. exports in the months ahead. Consequently, the trade deficit is expected to widen and bear negatively on headline GDP growth.
- Incoming employment numbers show a distinct improvement in hiring. The latest three-month moving average of payrolls at 195,000 is without doubt significantly better than the 135,000 average when the Fed announced the third round of asset purchases in September 2012.
- Favorable labor market data and the Feds plans to gradually wind down its asset purchases have resulted in higher Treasury market yields. The Feds attempts to convey its future plans initially hit some communication snags, which have largely been corrected. However, improving fundamental economic conditions will be associated with higher bond yields in the future; some overshooting can be expected at the turning points in the Feds policy stance.
- Persistent economic stress in the eurozone and the possibility of a hard landing in China will continue as risks that weigh negatively on the outlook for growth in the United States. Despite these headwinds, assuming the U.S. economy continues to march ahead, the Fed will take appropriate steps by year-end to scale back its asset purchases. The nature of incoming economic data will dictate the precise timing of the tapering plan.