Remember when 2016 was the year when the US economy was finally supposed to take off on “above trend” growth? Make that 2017.
Here is JPM’s chief economist Michael Feroli doing what banks are so good at doing: cutting their own US GDP growth forecasts.
Shave and a haircut, first half
We are shaving about a half percentage point off of our estimate for first half US real GDP growth. We estimate Q1 GDP increased at a 1.2% annualized pace (down from 2.0%), and we project Q2 GDP growth at 2.0% (down from 2.25% prior). The downward revision to Q1 follows a string of softer source data, starting with the February durable goods report and punctuated by the downward revision to January real consumer spending.
The downward revision to Q2 owes to slightly lower expectations for consumer spending — thanks to the rebound in gasoline prices and the corresponding hit to real disposable income — as well as to somewhat weaker momentum on capital spending.
If our tracking of Q1 GDP is correct, it would be the second consecutive quarter of growth close to potential, which we estimate at 1.4%. (Though labor markets would suggest we’ve just had two consecutive quarters of above-trend growth: the Q1 unemployment rate will likely be 0.3%-point below the Q3 average, and the employment-to-population ratio will be 0.4%-point above the Q3 figure). Even so, growth in the quarter about to end has generally disappointed expectations set at the beginning of the year.
Consumption growth in Q1 appears to have slowed to a 1.9% growth rate, which would be the slowest since the weather-impacted Q1 of last year, which came in at 1.8%. Moreover, the saving rate looks to have moved up from 5.0% in Q4 to 5.4% in Q1, which would be the first increase in a year (though we caution that prior increases in the saving rate over the past year have been revised away, a caveat to keep in mind when looking at the Q1 increase). The Q1 consumption disappointment is primarily due to a weak January outcome. Since then financial conditions have recovered, and most measures of consumer sentiment have held steady at fairly healthy levels. So we are inclined to see the disappointment in consumer spending in Q1 as fairly modest in magnitude and part of the inherent quarterly volatility. We look for a very modest firming in consumption over the remainder of the year to growth in the low- to mid-2’s. Our relatively unfazed assessment of household behavior is also supported by recent solid trends in residential investment — a spending category which likely posted its second consecutive double-digit quarter in Q1. Looking ahead we expect some cooling in housing, albeit to still-above trend growth.
Developments in capital spending have been a little more concerning. Business fixed investment spending likely contracted in Q1, the second straight down quarter. Even excluding the energy sector — which accounted for almost all of the slowing in cap-ex prior to Q4 — business investment spending looks roughly flat in Q4 and Q1. We look for total capital spending growth to be subdued in Q2, with modest gains thereafter. Cap-ex in the energy sector took 0.5%-point off of top-line GDP growth last year, and should be a notable drag again in Q1 and, to a lesser extent, Q2. The second-half fading of this drag — as energy cap-ex dwindles to bare bones levels — is an important reason why we see overall GDP growth getting a little better later this year. Business inventory investment has made only slow progress reverting to more sustainable levels. Recent inventory sentiment measures suggest firms are no longer in a hurry to destock, but a more rapid normalization of stockbuilding is a downside risk to our near-term growth outlook.
Real government spending had a hiccup in Q4 and Q1, though has generally been trending higher, particularly at the state and local level. We expect that trend to reassert itself, accompanied by a little lift to federal spending as the impulse from last year’s bipartisan budget bill kicks in. The foreign sector has been a drag, as net exports subtracted 0.5%-point from GDP last year. Some relief may be on the way in the form of a recently weaker dollar. Even so, the effects of currency movements on trade tend to exhibit quite long lags, and past dollar strength implies a drag from trade this year of around 0.3%-point (down a little from the 0.5% number pencilled in earlier in the year).
Our inflation outlook has been little-changed recently, and we continue to look for core PCE to modestly accelerate to 1.9% by year-end, which would imply about 0.15% average monthly increases over the remainder of the year. While we think a fair bit of the speed-up in core inflation the last two months was transitory in nature, the recent dollar weakness gives us some added confidence that price pressures should continue to modestly firm.
We continue to look for the next Fed move in July. Even though GDP growth has been disappointing, labor market performance has (thus far) been quite strong and core inflation has looked a little better lately. Global developments have also been more supportive recently (i.e. the dollar has continued to weaken). We believe these trends are supportive of a move around mid-year, which we also believe is consistent with the most recent dots and communications associated with those dots.
via Zero Hedge http://ift.tt/22SuzdZ Tyler Durden