US Economy in July 2015

While the US labour market (an important guide to monetary policy) has improved over the past months, positive developments in the economy’s underlying growth pattern have not fully materialised yet. The final number for GDP growth in 1Q15 has been revised up to a seasonally-adjusted-annualized rate (SAAR) of -0.2% from a previous SAAR of -0.7% q-o-q. While this is certainly a positive development, it remains to be seen to how the economy will continue to perform in the remainder of the year.

Following a large decline in the 1Q14, 2014 saw a strong rebound, and, similarly, the expectation is of around 3% growth for the remaining three quarters of 2015, as the current momentum is pointing clearly at an improvement. The magnitude, however, is not entirely clear yet. Some factors also point at potential structural changes in the US economy. Falling productivity and a participation rate in the labour market that is below the historical average, point at the possibility of an extended period of sub-par growth.

Hence, while positive surprises may not be ruled out, the past years’ economic growth pattern has demonstrated that the economy may have lost some of it strength and the recovery will probably take a while longer. On a positive note, personal consumption expenditures rose at a solid SAAR of 2.1% q-o-q. The decision of the Federal Reserve Board (Fed) will also be an influential data point in the upcoming months. While it still seems likely that, given the expectations of an improving US economy, the Fed may raise its interest rate level from almost 0% currently, the strength of the US dollar and the impact it may have on capital flows in emerging economies may delay this decision. Labour market indicators were mixed in June. The unemployment rate fell to 5.3% from 5.5% in May. Non-farm payrolls increased by 221,000 after an increase of 187,000 in May.

Capex reductions in the energy sector have also become obvious.

Jobs in mining and logging fell by 70,000 since the beginning of the year, but the situation seems to have improved with only 3,000 jobs lost in June. The share of longterm unemployed improved again to 25.8% in June, significantly lower than the 28.6% in May. This marks the lowest level since March 2009.

In line with the improvements in the labour market, consumer confidence rose strongly again in June, after having declined during the two months before. The conference board index stood at 101.4, after reaching a level of 95.4 in May. Signs of some recovery from the recent deceleration have also become visible in the purchasing manager’s index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), which improved to 53.5 in June from 52.8 in May. The ISM for the services sector, which contributes more than 70% to the economy, increased to 56 from 55.7 in May.

While the GDP growth forecast for 2015 remains at 2.4%, it remains to be seen if the economy will deliver an average growth rate of 3% for the remainder of the year as many uncertainties – not only domestically but also in the global economy – prevail. The 2016 growth forecast is pointing at slightly higher growth in the next year, when it may reach 2.6%. This will mainly be supported by rising domestic consumption and some improvement in exports.