Bank of the West U.S. Outlook Report for April 3, 2015
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US Outlook Report: Flat Start But Stronger Finish Still in Focus
It has been another ham-handed start to the year. Now we can add February real consumer spending, employment and the ISM manufacturing survey for March to the list of downbeat economic indicators.
The ISM manufacturing index for March slumped to 51.5, the weakest reading on this index since 2013. The new export orders sub-component fell deeper into contraction to 47.5, while the employment sub-index slipped into neutral at 50.0.
For the second week in a row we have cut our forecast for first quarter GDP. Last week we cut our business investment and industrial production forecasts due to the weakness in the durable goods orders report. Today, we cut our forecast for first quarter real consumer spending to 2.3% annualized in Q1 from 2.8%, leaving us with an estimate for Q1 real GDP of 1.2%.
Despite the onslaught of weaker economic data of late, I still see plenty of reasons for optimism about our near-term economic future. The decline in real consumer spending in the first quarter is just a temporary setback. Consumers, so far, have saved their windfall from lower gasoline prices. But I suspect unseasonable weather in much of the country and the West Coast port slowdown also added to the deterioration in real consumer spending in the first quarter.
Real personal income growth trends remain firmer than spending, household wealth continues to grow, and personal savings rates are high by recent standards at 5.8%. This will give consumers the necessary mojo to reignite spending in the second quarter. Indeed, the rebound in March consumer confidence, and indications of improving demand in residential housing from pending home sales and mortgage purchase applications bode well for real GDP growth in Q2 of 2.9%.
In short, despite intensifying headwinds from a strong dollar and bloated inventories on the U.S. manufacturing sector, the underpinnings of stronger domestic demand, consumer spending and employment growth remain intact. Don’t throw in-the-towel on 2015 yet.
To find out more, check out this week’s US Outlook Report.
Tags: economy
