US Outlook Report: Uneven Growth with Whiffs of Higher Prices
This week’s U.S. Trade report for March revealed an even more lopsided trade performance than was estimated in the Q1 Advance Real GDP report released last week. Continued weakness in U.S. exports and a surprisingly strong rebound in imports, as delays under the West Coast port slowdown eased, helped push the U.S. monthly trade deficit to its highest level since October of 2008; the trade deficit widened by a whopping $15.5 billion from February alone. Factoring in these March trade numbers, our current estimate of Q1 Real GDP dropped below stagnation into contraction territory at -0.3 percent annualized. Export growth should catch-up a bit in Q2, while import growth will slow, but even so, the trade deficit deterioration is expected to leave a visible mark on U.S. real GDP growth this year.
A rebound in real consumer spending growth and to some extent residential construction should help push growth back toward 2.4 percent annualized in Q2, but business investment is likely to remain weak at least for another quarter, while the U.S. trade deficit will be an even bigger drag on growth this year.
At the same time, the market’s view on U.S. inflation prospects appears to be evolving rapidly toward a more normal environment after several months of handwringing over deflation concerns. The solid bounce in global crude oil prices is likely helping to feed expectations in global bond markets that deflation will prove temporary. Inflation break-evens, like the 5-Year TIPS Spread, a proxy for bond investors’ medium-term inflation expectations, have moved dramatically higher in recent weeks, back to historical norms. This normalization of inflation expectations is a big part of the explanation of why we are seeing increasing long-term nominal interest rates in the U.S.
By the second half of 2015, growth will resume its nearly 3.0 percent pace. Markets appear to be responding early to the pick-up in forecasted growth with rising oil prices, increased inflation expectations and higher long-term interest rates. Market and Fed expectations around future inflation appear to be aligning nicely, keeping a September rate hike in sight.
To find out more, check out this week’s US Outlook Report.
Tags: economy