US Outlook Report: The Glass Half-Full Economy
Coming on the heels of an October FOMC statement that emphasized the glass half-full view of the labor market recovery over the past year, the advance estimate of U.S. GDP for the third quarter provided a similar view of recent U.S. economic growth. Consumer confidence is soaring, despite financial volatility and a weak global economy.
So is it time to finally get comfortable with a glass half-full view of the economy? In this week’s US Outlook report, we slice and dice the latest GDP figures and discuss the implications for our growth and interest rate outlook in the months and quarters ahead.
U.S. GDP growth for the third quarter was right in the “sweet spot” at 3.5%. In four of the past five quarters, U.S. GDP growth has averaged 4.0 percent at an annualized rate. The big upside surprise was the strength in U.S. export growth in Q3 (+7.8% annualized) and the large jump in Federal government (+10% annualized) and national defense spending (+16.0% annualized). Government spending added 0.83% to U.S. GDP growth in Q3, and net U.S. exports contributed 1.32% to U.S. GDP last quarter. Together these two components added 2.15 percentage points of the 3.5% growth in U.S. GDP in the third quarter.
The big gain in U.S. exports in the third quarter follows an even larger 11% increase in the second quarter, suggesting that the U.S. could be picking up global trade market share even as the rest of the world struggles to grow.
This is great news for U.S. growth prospects longer-term. A stronger trend growth rate for U.S. exports at the same time U.S. imports are falling on declining oil prices and a lower level of imports of crude oil is an unequivocal positive for the U.S. economy’s growth potential. A stronger U.S. dollar could dent some of this momentum over time, but we would need to see far more appreciation in the U.S. dollar than we have so far for it to have a material impact on this positive trade balance trend.
On a negative note, residential fixed investment only added 0.1 percentage points to U.S. GDP growth in the third quarter and has actually declined 1% from a year ago.
Looking ahead, we see real GDP growth slowing to around 2.7% in the fourth quarter as the outsized increases in exports and government spending moderate a bit, but this will be partially offset by real consumer spending that is poised to bounce back in the fourth quarter. Retail sales over the holiday season could be among some of the best we have seen in years. Real GDP growth of 3.1% in 2015 looks likely. This should keep the Fed on track with the first Fed funds rate hikes coming by the third quarter of next year. Higher long-term interest rates are forecast for 2015, and that will be okay in this glass half-full economy.
To find out more, check out this week’s US Outlook Report.
Tags: economy