US Outlook Report: Good Vibes Here Policy Easing There
The first round of U.S. economic releases for August have largely beaten analyst expectations, suggesting that much of the economic momentum seen in the second quarter will be sustained in the third. We maintain our U.S. Real GDP forecast at 3.1 percent for the third quarter. The highlights have been many, including the ISM Manufacturing and Non-Manufacturing indexes and vehicle sales for August. As a bonus July construction spending and the U.S. trade balance came in better than expected, implying a little more growth occurred in the second quarter. Tracking estimates peg second quarter U.S. GDP growth closer to 4.3 percent.
While consumers were noticeably absent in July, if August vehicle sales are any indication, the U.S. consumer is set to come roaring back in August. August vehicle sales blew past analyst expectations to 17.5 million units on an annualized basis from 16.4 million units in July, a 6.4 percent monthly increase and 5.0 percent above analyst estimates for August. Solid wealth gains, and rising consumer confidence, are giving consumers the backbone to go ahead with new vehicle purchases. It doesn’t hurt that financing costs remain historically low and bank’s willingness to lend in the space remains high.
Globally, the economic picture is much gloomier. Brazil’s Services PMI fell to 49.2 in August; contraction territory. The economic data out of the Eurozone remains troubling. Final Markit Service PMI’s for August were weaker than expected with large drops in Germany, France, and Spain. The ECB just cut its forecast for Eurozone growth this year and next to 0.9 and 1.6 percent from June’s forecast of 1.0 and 1.7 percent. The ECB inflation forecast for the Eurozone was also sliced to 0.6 percent for 2014 from 0.7 forecast in June.
The ECB took more action this week to stem rising deflationary pressures and try to stimulate credit growth in Europe. The result, two year sovereign bond yields in Germany, France, Switzerland, and Netherlands have turned negative. The ECB is now effectively charging European banks 0.2 percent to hold deposits on reserve at the European Central Bank, punishing banks that are holding reserves and not lending them out.
Even so, the ECB’s actions fall well short of a full-blown QE program that the Federal Reserve and Bank of Japan have pursued in recent years and so far do not include purchases of government bonds. The economic risks for Europe remain squarely on the downside in my opinion. A still timid ECB is probably behind the curve on deflation and recent action could once again fail to ignite stronger growth.
To find out the details of the ECB’s plans and what it means for growth and interest rates in the United States, check out this week’s U.S. Outlook Report for September 5, 2014.
Tags: economy
