US Outlook Report: Economy Dancing to a Different Beat
Before Brexit raised the level of global economic uncertainty at the end of June, the U.S. economy was clearly experiencing a growth spurt that has largely laid to rest investors’ concerns since the start of the year about an impending U.S. recession – even with a Brexit global economic shock likely still to come. Just when you thought the economic doldrums would last forever, the U.S. economy is suddenly dancing to a different beat.
Economic surprise indexes tell the unfolding story. Growing signs of economic weakness abound in the wake of Brexit vote, including Japan, Europe, and emerging markets, while the economic reports out of the United States have largely surpassed consensus expectations.
In fact, U.S. economic reports haven’t surpassed analyst expectations this consistently since 2014.
It all started with a robust June payroll report that showed broad-based job growth across nearly all major sectors of the economy – a net +287K jobs created overall. Moreover, initial jobless claims so far for July suggest this labor market momentum is continuing into late summer.
This has put consumers and investors in the mood to buy. Retail sales excluding motor vehicles increased at a 8.8% annualized pace in June. The three-month moving average of real retail sales (i.e. retail sales subtracting out the effects of inflation) increased at an impressive 4.4% pace. Retail sales were strong for most categories in June, except for clothing, food service and drinking places, electronics, and motor vehicles. Sales have lagged in clothing and electronics as lower foreign import prices hold down overall price increases.
Global and U.S. equity market valuations are now about $1 trillion above the level they were at before the Brexit vote as anticipation of more monetary stimulus in Japan, Europe, and the U.K. is combined with a resilient U.S. consumer spending outlook.
Not surprisingly, Fed funds futures market expectations of another rate hike from the FOMC before the end of the year are on the rise. Market expectations of a December rate hike are nearly 50-50 today at about 48%. We continue to expect in our baseline forecast one rate hike in December from the Fed and another two quarter-point increases coming in 2017.
To learn more, check out this week’s US Outlook Report.
Tags: Brexit, market, US economy