By David Payne
Moderate economic growth in the U.S. will continue in the second half of 2015, but won’t match the strong 3.7% boost seen in the second quarter.
We expect GDP to grow about 2.7% over the last six months of the year, resulting in an overall pickup of 2.5% for the full year, slightly ahead of 2014’s pace. The 3.7% spurt was simply a rebound from the bad weather of the first quarter. Overall growth for the first half was 2.2%.
Strong consumer spending is playing a big role in fueling the economic resurgence, helped by strong gains in disposable income and lower gasoline prices. Also helping: A ramp-up of construction activity, including home building. The housing market is having a good year, propelled by a stronger job market and rising wages plus pent-up demand and an increase in household formations.
Third-quarter growth should slow from the strong second quarter as inventories and state and local government construction slow from an unsustainable pace. Growth is likely to pick up again in the fourth quarter.
The biggest drag on U.S. growth going forward? International trade. Exports are discouraged and imports encouraged by the strong U.S. dollar, and by the strength of the U.S. economy relative to other nation’s economies. The slowdown in China will be a drag on U.S. exports, both to China itself and to its suppliers, such as South Korea and Japan. However, international trade is not likely to shave the U.S. growth rate by more than a few tenths of a percent.
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Employment
Poor jobs reports in August and September will likely delay the Federal Reserve’s first rate hike in recent years until December. The 142,000 jobs added in September and 136,000 in August were far below the average of 214,000 monthly jobs logged from January to July of this year, raising questions about the possibility of an economic slowdown. While we think job growth will bounce back this fall to at least 200,000, declining exports and low energy prices are hurting employment in manufacturing and mining.
Hiring in food, metals, machinery and semiconductors was down, most likely related to a decline in exports tied to the economic slowdown in China and other emerging markets.
There is less slack in the labor market, which sets the stage for wage increases later. The unemployment rate stayed at 5.1%, close to the level the Fed defines as being consistent with full employment. A broader measure of slack in the labor market adds discouraged workers who are out of the labor force and part-time workers who want to work full-time. This measure declined to 10% in September, still above its 8% low in 2007 but far below its recession peak of 17%.
Wage pressure is building, but very slowly. Average hourly earnings grew 2.2% over the past 12 months. Wage growth is likely to continue to be slow until the labor market tightens further. Look for a more noticeable pickup in 2016.
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Interest Rates
Last updated: September 4, 2015
By David Payne
Long-term interest rates should end the year at about 2.3%, just a bit above where they are now. They will get a slight bump up when the Federal Reserve raises short-term rates in the next month or two — the first increase since the recession. And 30-year fixed rate mortgages will wind up at 4.1% at the end of this year, versus 3.9% now.
Long-term rates will stay relatively low because U.S. Treasuries will continue to be attractive, given that:
● China’s growth is likely to continue slowing, keeping its central bank committed to easier monetary policy.
● The Fed won’t want to further boost the value of the dollar by making it even more attractive with higher rates.
● Uncertainties about Greece staying in the eurozone will persist well into 2016. Every hiccup will push more investors toward the safety of bonds from major economies.
● Consumer prices in the U.S. are unlikely to rev up much anytime soon.
● The European Central Bank will stay on its expansionary path despite improving growth in Europe. The ECB intends to keep buying 60 billion euros’ worth of bonds a month until September 2016, a substantial share of the Eurobond market.
We expect the Federal Reserve to bump up short-term interest rates by a quarter-point at either their October 28 meeting or their December 16 meeting. But we don’t see a second hike until several months later. Federal Reserve Chair Janet Yellen has indicated that increases are not going to happen at every meeting, as they did under former Fed Chairman Alan Greenspan between 2004 and 2006. She wants to be able to assess the effect of each hike before OK’ing the next one.
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Inflation
Last updated: September 23, 2015
By David Payne
Expect overall inflation of 2.3% by the end of 2016, after a mere 1.5% rise this year. Bringing inflation back to more normal levels: the end of declines in gasoline and energy prices next year. Recovery in those prices is likely to be small, perhaps only 3%, but enough to push inflation above 2%.
The core inflation rate, which excludes food and energy prices, will also be up about 2.3% in 2016, versus a 2.1% hike in 2015. The Federal Reserve considers the core rate a more reliable indicator of future inflation than the overall index. The increase next year will be roughly in line with an expected pickup in wage growth to 2.5% next year.
Look for food prices to grow by about 2%, double the pace in 2015. Food prices this year were affected by worldwide declines in commodity prices, despite shortages that led to strong price growth for such items as eggs.
A strong rental housing market will keep rents rising at a brisk pace of better than 4%, and overall shelter costs climbing by 3.6%. The increase in medical care costs will be moderate at 2.5%, helped by a slowing of prescription drug price increases, from 4.5% in 2015 to 3.5% in 2016.
Other areas where price pressures are likely to develop: Day care costs will rise 4% as more folks get jobs. College tuition will rise about 3.5%, outstripping inflation, as usual. Airline fares are likely to bump up a bit as fuel costs stop falling.
But sectors dominated by imports, such as appliances and home furnishings, are likely to see very little price inflation next year, as the relatively high value of the dollar keeps the cost of imports low.
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Business Spending
Last updated: September 25, 2015
By Glenn Somerville
We still anticipate a modest 4% rise in overall business spending this year. Auto manufacturing and the housing industry, in particular, will generate an increase in capital investment in the fourth quarter and into 2016.
No return to prerecession days, however, when double-digit increases in annual spending on new plant and equipment were common. Broader spending increases are largely being held back by the slump in energy exploration and development. Construction and mining giant Caterpillar Inc., for example, says it is laying off 10,000 employees because of slowing sales to customers affected by low oil prices. Meanwhile, the relatively weak global economy and strong dollar are restraining exports.
Capital goods orders excluding military wares and aircraft — a proxy for business spending plans — eased down fractionally in August by 0.2%. The slight pullback came on the heels of two successive months of hefty gains. Most of the drop occurred in orders for transportation goods, including new commercial aircraft and motor vehicles and parts. But there’s reason to expect at least a moderate improvement during the rest of the year and beyond, given that Boeing just picked up a $38-billion order from China for 300 new aircraft.
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