Underlying economic growth in the US is showing continued strength, with 3Q17 GDP reaching growth of 3.0% q-o-q at a seasonally adjusted annualised rate (SAAR) in the first of three estimates. This growth number would have been presumably even higher without the negative effects of the hurricane season in August and September. While growth is now forecast to be lower in 4Q17, particularly the rising consumer confidence, amid the recovery in the labour market, is pointing at a continued solid growth trend.
Business sentiment and consumer confidence may also be supported by the US Administration’s efforts to implement a tax reform in Congress. If this materializes in the near term, growth next year will also likely be higher. Importantly, the Federal Reserve (Fed) acknowledged the improvements and highlighted that the normalisation of interest rates would continue and it seems likely that the key policy interest rate will be revised up again in December by 25 basis-points. The main driver for the strong numbers seen in 3Q17 was personal household consumption, which expanded by 2.4% q-o-q SAAR, the outcome of a considerably strengthening labour market. It is estimated that 3Q17 exports rose by 2.4% q-o-q SAAR, while imports have declined by 0.8% q-o-q SAAR, bringing down the US trade deficit. Investments continued to grow, with a considerable share coming from the energy sector. Private investments advanced by 6.0% q-o-q SAAR, with investments in the oil sector and related activities – so-called investments into mining exploration, shafts, and wells – rising by 21.7% q-o-q SAAR.
The tax framework is still under discussion and while some form of a framework has been established, it remains to be seen how negotiations in Congress will develop. It is likely that this will boost GDP growth in the short-term, but the magnitude may vary, depending on the depth and the details of the reform. Both the proposal of the Senate and the House are now suggesting a deficit increase of $1.5 trillion over 10 years. A valid concern is that this rising deficit, in combination with growing underlying inflation, may require the Fed to raise interest rates less gradually than currently anticipated. In combination with the discussions on the tax reform, a potentially upcoming debate on the debt ceiling will also need close monitoring as the debt-ceiling agreement expires in December and would need to be extended. This has also been intensively discussed in the past and remains important in light of the likely perspective of a rising budget deficit.
While the Fed has highlighted that its monetary policies are contingent on the development of the domestic economy in general, the labour market, inflation and potential spill-overs to the global economy, recent comments seem to indicate that the Fed will pursue its tightening cycle as planned. It is expected that the key policy rate will be increased by 25 bp in the upcoming December meeting. Inflation stood at 2.2% y-o-y in September, again rising for a third consecutive month and confirming a solid trend that would also allow the Fed to continue tightening. Core inflation, excluding volatile items such as food and energy, remained at 1.7% y-o-y for the fifth consecutive month, below the Fed’s inflation target of around 2%, but should also be expected to pick up, given the tightness in the labour market.
The labour market’s positive momentum continued and clearly recovered after the negative impact by the hurricane season in August and September. Non-farm payrolls increased again by 261.000 jobs in October, after they rose by only 18.000 in September, as shown in the latest labour market report. The sector that was mostly affected by the hurricanes - leisure and hospitality – recovered almost all job losses from August and September, as the sector saw 106.000 job additions in October. Positively, the unemployment rate fell to 4.1%, while average hourly earnings growth for the private sector stood at only 2.4% y-o-y, the lowest since the beginning of 2016. This is, however, expected to pick up again given the ongoing improvements in the labour market. Long-term unemployment numbers fell slightly to stand at 24.8% in October, after 25.5% in September. On the slightly negative side, the participation rate fell again to stand at 62.7% in October, after 63.1% in September.
While having picked up in September, industrial production nevertheless seems to have been impacted by weather conditions during the month, to increase by just 1.6% y-o-y, after August’s low rise of only 1.1% y-o-y, both numbers compared with around 2% growth in previous months. Domestic demand held up very well in September, supported by growth in retail sales, which stood at 4.1% y-o-y, after an already strong August number of 3.9% y-o-y. The generally positive trend in domestic consumption was also visible in the Conference Board’s Consumer Confidence Index, which increased to 125.9 in October, a multi-year high and which compares to 120.6 in September.
October’s PMI for the manufacturing sector, as provided by the ISM, also indicated ongoing support in the underlying economy, with very strong numbers in both the manufacturing and nonmanufacturing sectors. The manufacturing PMI fell, but remained at a very high level of 58.7, compared to 60.8 in September. The important index for the services sector, which constitutes more than 70% of the US economy, rose to 60.1, after a level of 59.8 in September.
Given the considerable growth in 3Q17 and expectations that the current momentum will also continue in 2018, the US GDP growth forecast for both 2017 and 2018 was raised by 0.1 percentage points (pp) each. The growth forecast for 2017 now stands at 2.2% and GDP growth in 2018 is estimated to reach 2.4%. This takes into consideration a slightly positive outcome of the US administration’s tax proposal, to positively impact the 2018 GDP growth forecast by 0.1 pp.